Nonprofit Mergers: When Culture Trumps the Contracts
The number of nonprofits considering a merger increased during the pandemic. The National Council of Nonprofits reported in February that state associations and consultants have received “markedly increased requests” for information about how to dissolve or merge nonprofits. Meanwhile, its nonprofit dissolution web page has had a 30% increase in visits since January 2021.
Mergers can be seen from coast to coast. The Delaware SPCA and the Delaware Humane Association merged because of their broad overlap of services and the fact that they both operated at losses in 2019.
In San Diego, the Friends of Balboa Park and The Balboa Conservancy merged a year ago. They adopted a new name for the organization to show a “willingness to embrace change as well as our belief in becoming an even stronger partner to all who value Balboa Park and want to help sustain and support it.”
Contemplation of a merger for financial or synergetic reasons should be balanced with protecting community-based services and fulfilling the organization’s exempt purpose. Any merger or consolidation is a substantial change for any organization.
However, there is no blueprint for a successful merger. While the Balboa Park groups surrendered their brands, The Arc of Palm Beach County consolidated with Seagull Services and the Palm Beach Habilitation Center in February. The latter two essentially became subsidiaries of The Arc and may keep their names. When the public television stations in West Palm Beach and Miami merged in 2015, they formed a new, stronger brand that capitalized on their newfound regionalism and their PBS affiliation in creating WXEL South Florida PBS.
Get the Board on Board
Before boards of directors vote on a merger, they must complete several essential steps, including:
- Investigating each organization’s finances and being prepared for the financial realities of the transaction.
- Reviewing bylaws and governance policies and procedures. These can encumber the merger and surviving or managing organization.
- Developing an outline, or term sheet, with the merger partner setting forth how to proceed going forward and post-merger.
Reports and due diligence reviews are fine, but as critical — or maybe more so — is an alignment of the people. That begins with the boards of directors, whose members may have strong egos and conflicting visions. Emotions can interfere with what should be a dispassionate discussion of realities, such as survival, opportunities for growth and maximizing services to fulfill the mission.
The solution lies in open, honest discussion about the differences and the consequences of leaving a bad taste in the mouths of the largest benefactors on the boards. While complete harmony may be unattainable, an understanding of each other’s positions can move the group from conflict to resolution.
The wrong way to approach the situation is to call all the board members together and let them lecture each other on the right way to do things. The constructive approach is to appoint one or two representatives from each side to ferry communications. The physical buffer and open channel will dampen differences that can blossom into hostilities.
Sensitive subjects must be broached, such as:
- Is there a power differential among the organizations or is it truly a merger of equals?
- How will board seats be apportioned?
- Which programs will be preserved, and which will be diminished or discontinued due to cost or overlap?
- Who will manage operations and under whose rules?
- Will safeguards be created to protect a weaker organization’s directors or essential programs after the merger is completed?
If enough agreement can be reached on fundamental issues, the process can proceed with small committees — each with three or four people — that hash out legal, accounting and management details, among others. The members should be professionals, who by their credentials and ability to address issues dispassionately, hold the trust of both sides.
Determine Any Potential Funding and Culture Issues
When leaders come to some form of agreement, they are far from done. They must secure buy-in from internal and external parties, an often delicate and complex process that must be handled properly to avoid a rapid undoing of what may be six to 12 months of work behind the scenes.
Consider this hypothetical: A nonprofit receives a sizable sum in its name annually from a trust. What happens when the entity is subsumed or, as in the case of the Balboa Park groups, forms a new identity? Time to re-read the pledge agreement or trust documents. If the philanthropist is deceased, better also check as to whether an heir or a foundation administering the trust might have grounds to terminate the periodic gift.
The same considerations must be made for restricted funds. Might a merger violate the terms and conditions of a donation, grant or services contract? All this must be done before the boards sell the plan to donors and grantors
The largest consideration may be the employees. Can teams that operate under different flags with distinct cultures work in harmony? Will they feel that the employees at the other nonprofit share and express their passion for helping the community in the same way? To what extent do the groups need to interact if they serve different populations or operate in different markets?
Differences can emerge in unexpected ways, like when the Davis Street Community Center in San Leandro, California, merged with San Leandro Community Counseling in 2001.
“The stars were aligned. It was like a puzzle and the pieces just fit,” Rose Padilla Johnson, executive director of the center, said in a 2007 article in the Stanford Social Innovation Review.
The employees didn’t feel the same way.
“The things we thought would be challenges were not,” Padilla Johnson said. “The things we had no idea about were the challenges. Culture has to be right up there with funding, worked from the start.”
To develop a plan, it is essential to have attorneys who are experts in both the unique legal, regulatory and governance requirements and related cultural obstacles in complex nonprofit transactions. In some cases, consultants will need to execute strategies to eliminate the friction points among the employees to create a lasting harmony.
A unification in spirit is key to ensure the prosperity of the merged organizations beyond the protections and assurances of well-crafted legal documents, budgets and balance sheets. Emotions ranging from an exaggerated sense of importance to a fear of losing one’s job can undermine the strategic fit, and the legal and financial logic of a merger.
“When WPBT and WXEL merged to create South Florida PBS in 2015, two culturally distinct boards came together under a shared vision, and together embraced a new blended culture, which resulted in an organization that is stronger, more resilient and which provides new and expanded services to its communities,” Dolores Sukhdeo, CEO and president of WXEL South Florida PBS, told me.
With proper guidance, a path can be charted and explored. It may lead to a merger or consolidation, or perhaps just a strategic partnership or joint venture. In any case, what the nonprofits learn in the process will benefit the entire community.
Philip DiComo is a shareholder at Nason Yeager. Philip serves as outside general counsel to a variety of both commercial and nonprofit organizations across various industries and tax statuses. He also concentrates his practice in the areas of emerging companies, entertainment and licensing, mergers and acquisitions, and executive employment arrangements.
Philip is widely recognized for his vast knowledge in nonprofit governance, policy and practices. In 2014, he earned the Chartered Advisor in Philanthropy professional designation from The American College. The designation positions him as a leader in the philanthropy sector and qualifies him to help charities achieve financial success and donors to maximize their philanthropic giving. His early career was in media where he worked for nonprofit public television and radio stations for 15 years. Then, while working full-time in broadcasting, he attended law school at night.
A Florida native, Philip enjoys simple pleasures, like getting up early, sitting outside with his coffee, and listening to and watching the birds. He also enjoys reading, working in his yard and is a fan of all Florida Gator athletics.