Due diligence can uncover unknown information, so thorough due diligence is important regardless of the transacting parties’ relationship, goodwill, or trust.
When considering acquiring another nonprofit, there are two types of acquisitions that are typically considered “ an asset purchase and a merger transaction. Several factors, including due diligence, payment of consideration, assumption of liability, assignment of contracts (including endowment agreements), existence of planned gifts, future operating goals and applicable state and federal laws, should be considered in determining the structure of the potential transaction.
Merger proposals are being prompted by reduction of funding sources, the tight economy, the need for succession planning and a desire to consolidate expenses and increase capacity. Also, many funders prefer to deal with fewer providers of the same programs or services and encourage mergers and other forms of collaboration to reduce overhead and increase capacity. There are special challenges for nonprofits considering a merger. Factors, such as increased capacity and cost savings, drive the deal. Because these benefits can be more difficult to quantify, a proposed merger can feel threatening to a nonprofit board who feels they may lose power and influence.
Dissolution is something no nonprofit board member or CEO wants to face, however, it does not have to mean failure of the nonprofit’s mission. With the right strategic partner and a will to collaborate, there is nearly always a way to save the programs that provide the greatest benefit to the community.
Sometimes collaborations do not go smoothly. This post summarizes some of the pitfalls and lessons learned when a nonprofit tried to acquire a struggling nonprofit for all the right reasons, but the effort ended up being more trouble than it was worth.
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