We all know that 2020 has been a brutal year for nonprofits. Unfortunately, we are starting to see more nonprofits struggle with sustainability. We have helped many organizations wind-down their operations over the years, and in most cases, there have been one or more core programs that could be salvaged. In many cases, a joint partner allowed the charity to continue its most viable programs in one form or another.
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.
Prior to passage of AREA, an entity seeking to change its structure likely had to undergo a multi-step transaction to accomplish its goal. AREA permits direct conversions and makes clear that it applies to all entity types (corporations, nonprofits, benefit corporations, LLCs, partnerships, etc.).
“Co-working” has exploded in the last five years. Essentially, co-working spaces are places where workers – typically freelancers, self-employed individuals and start-up ventures – can go to work while being surrounded by like-minded, creative entrepreneurs without having to rent their own offices. Many co-working spaces have a mission to create social change and spur community rejuvenation, making them of great interest to the social impact sector.
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.
We have blogged about the phenomenon of nonprofit hostile takeovers and the fact that no one owns a nonprofit. However, there is always control. Although nonprofits generally lack shares that can be owned and transferred, there are many ways to ensure a level of control or influence over a nonprofit entity. Those seeking to control a nonprofit or balance governance rights among different stakeholders need to understand the available options.
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 no good deed goes unpunished. In this case, the board and staff of both nonprofits did a great job of putting their mission and beneficiaries first, only to be ambushed by their lack of stakeholder communication and buy-in.
Often, in an effort to save money, clients come to their attorneys with a plan and simply ask them to “draft X.” Frequently, X isn’t the most appropriate solution. This case was one of those. The deal started out as an acquisition with the lawyer (me!) being kept at arm’s length when in fact more involvment early on would have quickly identified that this program was not a candidate for an acquisition, but rather a simple management arrangement.
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.
Case study of successes, disappointments and lessons learned from a successful merger of two human service organizations.