The Secret to a Successful Nonprofit Merger

In recent years there has been a massive upswing in the number of nonprofit mergers and affiliations throughout the country. As a nonprofit consulting firm that has facilitated a number of merger transactions for our clients, we have seen firsthand the factors that contribute to deal success.

In a for-profit merger transaction, the success of the deal is often attributed to a mutually agreed-upon valuation that would entice a seller to sell and a buyer to buy. In a nonprofit transaction, there is no exchange of money to acquire or purchase an entity, therefore valuation is not an issue. The fact is, a nonprofit and a for-profit merger are very different in both how they are facilitated and how they are transacted.

So what can most successful nonprofit mergers and affiliations be attributed to?

A nonprofit merger or affiliation (M&A) is weighted heavily on the relationships that exist between two organizations. Meaning, the currency of a nonprofit deal is the relationship that exists between the two organizations, which means the progress of the deal will move at the speed of trust.

While there are many relationships to consider as part of an M&A deal, the majority of the time an opportunity will arise from a relationship between two CEOs. This relationship may begin with an idea one CEO has about succession, sustainability, or workforce, and evolve into a series of discussions about M&A as a solution or strategy . Other times two CEO’s begin by exploring the synergies, value, strategic rationale, benefits, and deal structure between their organizations. 

Part of what is occurring during these initial meetings between CEOs is gauging the level of trust and like-mindedness. A solid relationship between leaders will have common themes: they act in good faith, they make agreements and stick with them, they communicate clearly, and most importantly, they value their commitment to the mission over personal egos. As both leaders gain confidence and trust in each other, discussions can be expanded to include the boards. Having CEO alignment prior to approaching the boards will be an advantage when it comes time to convince them of the merits of an M&A deal. 

After both CEOs have developed a deep enough understanding of the potential M&A opportunity and can clearly articulate their strategy, it is time to bridge the conversation with the boards. When bridging the conversation, it is important to follow a sequence or path to building these relationships. It takes time to developing and cultivate ideas with people and we recommend the following process to generate ideas and discussion and to grow relationships:

1. Each CEO and Board Chair meets to discuss the opportunity and gain agreement on the merits of the proposed opportunity. This helps to ensure there is alignment and the potential to move conversations forward.

2. Each CEO and Board Chair meets to discuss the opportunity with their respective Executive Committee. This helps to build an understanding of each board's level of support, opposition, and thinking. 

3. The CEOs and Board Chairs of both organizations have a meeting to get to know each other and discuss the opportunity. Relationships take time to develop as does the education around the opportunity. Taking the time to foster this relationship is important as the Board Chairs are responsible for determining if the potential opportunity merits presenting it to the Executive Committee or the full Board.

4. The CEO’s and Executive Committees meet, which should ideally be done in-person. This is a relationship building meeting for board members to get to know each other and discuss the strategic rationale of a deal.

As relationships and understanding grows at each phase, the deal will take on momentum based on how solid the relationships become. As Executive Committee meetings progress, that group will begin to tackle some of the more challenging issues and discussions which, if facilitated properly, will further strengthen those relationships.

Eventually these relationships and discussions will evolve to include the full board and executive leadership teams. If the trust and confidence in working with each other has been well-established early on, it will carry forward into the discussions and work that follows.

While this does not mean the process will be without hurdles and challenges, having a high level of commitment and trust will greatly impact the success of the strategic rationale.