I originally published this blog in 2019, well before COVID-19. At that time, there were many different reasons why not-for-profits considered mergers. They included reducing duplication; better coordination of service delivery; improved quality of services; and/or increased efficiency through the merger of backroom services such as finance, human resources, IT, QA, etc.
Today, the impact of COVID-19 on fundraising is a new force behind the interest in mergers. COVID-19 has thrown traditional fundraising into a tailspin. Large donors are saying that they are not open to funding new projects, at least for the next 18 months. The funds that they usually have allocated for new projects are being directed toward COVID-19 related projects and towards meeting the increased demands from the projects they are currently funding. In addition, the average donor is directing most of their charitable donations toward COVID-19 initiatives. This is leaving some charities in precarious situations, with fewer dollars to meet ongoing budget needs.
More and more charities are beginning to explore mergers as a way of survival.
If your organization is one of these charities, there are a few helpful tips you should consider when looking for a potential partner. When exploring mergers there are three different types to consider:
Horizontal mergers occur when two or more organizations provide similar services and merge to create a new, larger organization with greater market share. It focuses on joining operations and programs to enhance service and reduce backroom costs. An example is two similar home care agencies joining forces.
Vertical mergers join two organizations that provide services within the same service continuum. It allows for better integration and control over related elements of service required to meet the needs of clients. An example is a children’s mental health agency that provides residential treatment and a children’s mental health agency that provides community-based treatment joining forces.
Conglomerate mergers occur when two or more organizations offer different services in different markets and create a new, parent organization. Conglomerate mergers gain diversity in service mix, create larger capacity and revenue base and are undertaken to develop stronger long term sustainability. An example is a child welfare agency, a children’s mental health agency, a family counselling agency and an employment services agency joining forces.
Mergers can look different depending on the sizes of the organizations involved. If organizations are a similar size then the merger will feel like a true partnership or coming together of two organizations. If one agency is significantly larger than the other, or if one is unionized and the other is not then there are very different dynamics that need to be considered and taken into account during the planning.
Although mergers are often described as creating efficiencies this may only be related to backroom services. Mergers are expensive propositions, sometimes in the short and often in the medium term. Since salaries and benefits are approximately 80% of a not-for-profit’s budget analysis of any potential merger must take into account the potential costs related to adjustments to salaries and benefits that may arise from a merger. If one or more of the merging agencies are unionized future adjustments related to differences in Collective Agreements need to be considered and planned for.
When exploring a potential merger, a list of due diligence tasks needs to be agreed to by the two or more boards of directors who are considering a merger. The list should include an analysis of items such as:
- Organizational structure;
- Organizational culture;
- Financial data;
- Funders;
- Program data;
- Property, Assets, Liabilities;
- Insurance, Legal information;
- Human resources issues;
- Information Systems;
- Accreditation;
- Agreements and/or partnerships with other organizations; and
- Provincial and/or National Memberships.
Although funding pressures may be the driver in your merger discussions, they should not over-ride the due diligence process outlined above. There are many challenges when exploring mergers. The best rule of thumb is for boards that are considering a merger to come together in a partnership to undertake a comprehensive due diligence process.
For a free consultation on mergers, please contact Ellis Katsof at [email protected], call me at 905-933-3651 or visit http://localhost/osborne
