Board Cafe: Mergers: What Does a Typical Process Look Like?

Board Cafe

Mergers: What Does a Typical Process Look Like?

by Alfredo Vergara-Lobo, Jan Masaoka, and Sabrina Smith
Excerpted from the upcoming A Board Member's Guide to Mergers, available in July at http://www.compasspoint.org/bookstore

For a variety of reasons, nonprofit boards may find themselves considering a merger with another nonprofit. They may be facing, for example, financial difficulties, the departure of an executive director, a struggle to recruit staff or board talent, the suggestion by a funder, or a request to merge from another organization. Merging with another nonprofit may be a way to consolidate leadership, attract new funding, maintain or expand services, reduce competition among nonprofits for funding, and set the stage for new opportunities.

Unlike the situation with for-profit companies, there are no "hostile takeovers" in nonprofits. Each board must exercise its full responsibilities to make an independent decision. Each board has twin responsibilities-on behalf of its organization, to guard its organization's interests, and on behalf of the community, to make the final determination of whether a merger serves the broader public.

Board members may be reluctant to bring up the idea of merger as it seems to imply a lack of faith that the organization will get through a change, such as a financial crisis or the departure of the executive director. Or they may shy away from raising the matter with board members they know at another organization, mistakenly thinking that it's better for inter-organization discussion to happen between executives. However, when board members use their contacts and friendships with board members of other organizations, both sides benefit. Board members that understand what other organizations are doing are key factors in each organization's ability to explore a variety of partnerships, not only mergers, that will enhance services to the community.

Once merger is on the table, each board can convene a board-staff merger committee to meet with the other organization's merger committee and, if appropriate, negotiate with that committee an agreement that each committee can take to its board for approval. Matters to be explored may include: the fit between the two organizations' missions and programs, the impact of a merger on program services and on funding, and differences in organizational cultures. The committees may reach agreement on organizational name, executive director, location(s), financial assets and debts, board officers, special actions related to staff retention or departures. Since merger requires a significant amount of negotiations and compromise, it is crucial that each organization's board exercise effective and open communication to allow the merger committee to properly reflect the board's position.

To express a serious intent to explore a merger in good faith, the merger committees may recommend that their respective boards pass an intent to merger resolution, which lays out basic agreements for the merger exploration process. In addition to providing a memorandum of understanding between the organizations considering merger, the passage of an intent to merger resolution by the respective boards of directors assures staff and the other organization(s) that the merger discussions are an effort of the whole board, not just a few people.

Common drivers in for-profit mergers are: increased ability to obtain loans/investors, and the opportunity to reduce administrative staff. Neither of these reasons is typically relevant for nonprofits, which are not funded by debt or ownership stakes, and often have severely under-staffed administrations. Research shows that nonprofit mergers don't result in reducing administrative costs, but they do result in preserving what might have been lost: programs, services, and the intangible, but valuable mission and community ownership.

Original publication date: 06/28/2004

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