Mergers and acquisitions (M&A) are commonly included in an organization’s growth strategy. For-profit companies can use mergers and/or acquisitions to accomplish increased revenues, expansion, leadership transfers, better-leveraged expenses, and more. Growth-focused nonprofit organizations also engage in strategic M&A activities to benefit their entities.
What Are Mergers And Acquisitions?
The phrase, mergers and acquisitions, or M&A, is used to describe the consolidation or transfer of companies, assets, or teams. By definition, a merger is when two organizations join and move forward in business as one single owned firm. An acquisition refers to the process when one company purchases, or acquires, a separate entity, incorporating it into the current operational structure of the company. Since the terms are often used together, the definition of each is often interchanged.
Benefits Of Mergers And Acquisitions For Nonprofits
There are different reasons a nonprofit entity may engage in M&A activities. The purpose of developing merger and acquisition strategies will depend on the current status of the nonprofit, which includes characteristics like age, goals, current revenues, and mission. Before considering entering into a merger or acquisition at any part of the transaction, a nonprofit should clearly define how they hope the organization will benefit.
Some common benefits of successful nonprofit mergers and acquisitions include:
- Reduced overhead
- Increased service reach
- Availability of resources
- Leadership growth
- Effective management
- Restructured board of directors
- Cross-promotion of complimentary services
4 Best Practices For Nonprofit M&A
Mergers and acquisitions are great strategic tools for all kinds of companies. Nonprofits, however, must consider more than the growth of the company. Nonprofit organizations exist for a purpose much greater than profit. They are driven by the desire to serve their members and/or their communities. When considering mergers and acquisitions, a nonprofit must first consider how the decision aligns with the mission of the organization. We’ve highlighted some direct best practices for nonprofits engaging in M&A.
All major business decisions require some level of due diligence. When considering entering in growth strategies, like mergers and acquisitions, nonprofits must thoroughly complete a period of due diligence. Any offer or proposal will include ample time for due diligence, so it is vital that nonprofit leaders do not feel rushed in any decision.
When completing due diligence, both organizations will be required to submit documentation about the financial and overall health of the company. Reviewing and selecting the right companies to acquire, be acquired by, or merge with requires a thorough research phase.
Do the organizations in question have the necessary resources, experience, and ability to carry out the M&A? A merger and/or acquisition can be a long and draining transaction. It is recommended to be sure to have the right professionals in place. Both companies should enlist the assistance of advisory firms or legal counsel experienced with nonprofit M&A.
Streamline Mission Focus
At the heart of the nonprofit is the mission. At times, entities get caught up in growth intentions and fail to keep the mission at the center of all decision-making. When considering adding merger and acquisition strategies to the business plan, the company must remain mission-focused. When considering other companies to work with, find organizations that will not only scale up operations but also help the nonprofit succeed in fulfilling its mission.
Which kind of nonprofit entities will create synergies with existing operations? Choosing to work with nonprofits that share similar missions and business models will make for a smooth transition. When a merger or acquisition is complete, the companies are functioning under one operational structure. That structure must be a good fit for the goals of both separate entities.
Nonprofits hold specific designations like tax-exempt status and charitable organization state status. The internal revenue service (IRS) grants and regulates the tax-exempt status of those entities. There are required actions with the IRS when a nonprofit enters an agreement for M&A. It is recommended that nonprofit leaders and decision-makers reach out to the IRS to obtain a private letter stating the tax consequences of the merger with the company they have entered a contract with. This will ensure that the tax-exempt status is not at risk throughout the M&A. The IRS must also be informed which can often be achieved by filing a final Form 990.
Nonprofits with religious affiliation, like churches, must also consider the resulting company’s religious status. One of the most commonly neglected impacts of a merger and acquisition is that on the retirement plan. For organizations that hold church status, retirement plans may require additional contributions before any merger or acquisition. It is best to work with those plan administrators before entering into an agreement.
One reason many mergers and acquisitions do not make it to closing, or completion, is donor restrictions. Assessing whether each nonprofit organization has any donor or charter restrictions that may impact M&A activity should be completed during the due diligence phase of an agreement. Donor restrictions may prevent the consolidation of funds or endowments. They may also restrict the allowed activities with planned giving programs.
Preparation for a successful merger and/or acquisition will require donor outreach, but all communication with external parties before the deal is complete must be selective. Utilizing legal counsel is the best practice when approaching donor restrictions and requirements in M&A activities.
Mergers and acquisitions are a powerful growth strategy for many companies. However, just like any other business decision, they must be entered into with careful consideration of the overall organization. Some best practices for nonprofits entering M&A activities include:
- Complete due diligence
- Consider the impact on the mission
- Protect the intended designation statuses
- Proactively work with donor restrictions
When a nonprofit organization is considering M&A activity, it is best to work with legal and financial counsel to thoroughly analyze the impact the transaction will have on the future of the organization. If you have questions about entering into a merger and acquisition or are struggling to apply the changes to financial statements, reach out to JFW Accounting Services today for help.