By Mim Minichiello and Melissa Straka
For nonprofit leaders, 2020 saw greater demands from constituents and fewer resources to meet them. The loss of corporate partners, the inability to hold fundraisers and the reality of government grants drying up has caused many nonprofits to consider merging with another organization or acquiring one.
Nonprofit leaders may have not given M&A much thought prior to the pandemic. But making such a move could make sense for many nonprofits, as reduced funding has raised the specter of cutting services and staff — or even dissolution.
As executives and board members at the nation’s 1.6 million charitable organizations consider the benefits of an M&A, they often have more questions than answers. A few of the most important considerations include:
- Do the entities have a shared vision?
- Will the merger assist in achieving the organization’s short- and long-term goals?
- Who will lead the combined organization?
These questions are just the beginning of due diligence ahead of an M&A — mergers are complex business transactions and informed decision requires proper inquiry.
Considerations for nonprofit M&A
Nonprofits with similar missions may be well-suited to merge or acquire one another, as are nonprofits that offer different services to a similar customer base. These two scenarios will trigger different risks, and both must consider the following from the early stages of the transaction:
Due diligence. This will be the biggest indicator of success. Thorough due diligence requires a long list of items to review: it includes tax records; contracts; licenses; claims or litigation; audits; budgets; annual reports; governing and organizational structures; and affiliations.
Impact on organizational culture. Meshing cultures is important, as organizational culture in a nonprofit helps determine its success; culture incompatibility can undermine nonprofit mergers. Tangent to determining the cultural fit is determining how the merger affects workers that remain in a merged entity. Alignment of their roles and benefits is also key to determining the long-term health of the new nonprofit.
Consolidation. Aside from the complicated legal side of merging staff and the board, consolidation includes bringing together pay and benefits; facilities; legal representation and fees; technology and vendors — and doing so seamlessly and efficiently.
Mitigating M&A risk for nonprofits
After determining the considerations of merger and deciding to move forward, nonprofit executives have another issue to consider: M&A risk. Every merger and acquisition in every industry faces risks, but nonprofits have specific M&A exposures, including:
- Coverage for new program risks. Insurance underwriters may add on new exposures from a merger to existing coverage or may need to totally rewrite policies, depending on the size and type of new risks. Consult with your broker about the new entity and its new risks.
- Directors & Officers policy language. When merging entities, D&O coverage must absorb the liabilities of the new organization. Extended reporting coverage (known as a tail) will cover legacy issues post-M&A, but you must factor in change in control insurance policy restrictions for the acquiring entity.
- Abuse and molestation exposure. Merging with or acquiring another organization means assuming responsibility for past abuse at that organization. The difference in the language of claims-made policies versus occurrence policies is significant. A claims- made policy means the new entity may be limited to cover a statue-of-limitations obligation for any future claims of past abuse.
- HR implications, including workers’ compensation and employee benefits risk. The state of the other nonprofit’s workers compensation claims will affect workers’ comp coverage. Their experience modification (the multiplier used to calculate premiums based on past claims) of the merged or acquired entity will be folded into the new organization even if employees from an acquired entity aren’t part of the new nonprofit. Similarly, medical risks will join the joint coverage risk pool, and their medical plans and benefits need to be reconciled into a single entity. One large workers’ comp or medical claim can affect an organization’s experience mod for years.
Contact your HUB nonprofit expert for more information on reducing your nonprofit organization’s exposures before, during and after an M&A.