When More Is More: Nonprofit Mergers

Nonprofit organizations operate in a dynamic and complex environment, facing multiple challenges in fulfilling their missions. For some organizations, a merger with a compatible partner may enable them to operate more efficiently and to deliver services with greater effectiveness.

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By Ben Delaney

© 2023 ImmersivEdge Advisors. All rights reserved.

Nonprofit organizations operate in a dynamic and complex environment, where they face multiple challenges in fulfilling their missions effectively. For some organizations, collaborations with partners, ranging from individuals to government agencies, enables them to add leverage to their own resources to increase their impact. However in some situations, a merger of organizations may enable them to operate more efficiently and to deliver services with greater effectiveness.

In this article, we will explore when it might be a good idea for a nonprofit organization to merge with another organization, considering the benefits and challenges of the merger process.

Reasons to consider a merger

One of the main reasons for nonprofit organizations to merge, as it is for setting up collaborative agreements, is to increase impact and reach, as well as to broaden their services, programs, and geographic locations. For example, in 2016, the American Cancer Society and the St. Jude Children’s Research Hospital announced a strategic collaboration to share resources and expertise in cancer research and treatment, which resulted in better outcomes for cancer patients (American Cancer Society, 2016). By merging or establishing strategic collaborations, nonprofit organizations can leverage their strengths and expertise to deliver more comprehensive and effective services to their beneficiaries.

Another reason for nonprofit organizations to merge is to enhance their efficiency and effectiveness. Nonprofit organizations may merge to reduce administrative costs, streamline operations, and improve resource allocation. According to a study by the Bridgespan Group, a nonprofit consultancy firm, nonprofit mergers can result in cost savings of up to 20% in the first year of operation (Bridgespan Group, 2015). Merging also allows organizations to eliminate redundancies, such as multiple fundraising campaigns or separate IT systems, and to direct additional resources towards their mission.

Nonprofit organizations may also merge to respond to changes in the external environment, such as shifts in funding, regulations, or demographics. For example, nonprofit organizations that depend on government funding may merge to increase their bargaining power and better navigate changes in public policies. Nonprofit organizations that serve specific populations, such as refugees, immigrants, or minorities, may merge to better address the unique challenges and needs of their beneficiaries. Nonprofit organizations may also merge to adapt to technological advancements or changing market trends, such as the rise of online platforms or social entrepreneurship.

Some organizations may find themselves struggling with financial sustainability, mission alignment, or declining community support. In such situations, merging with another nonprofit organization can be a viable solution to address these challenges and enhance the overall impact of the organizations involved. However, if finances are a problem, merging may be more difficult. In situations where a nonprofit organization sees structural problems, it is best to consider a merger early, as healthy nonprofits will not be eager to join with an organization that offers problems without commiserate benefits and strengths.

Benefits of Merging Nonprofit Organizations

Merging nonprofit organizations can bring several benefits that can enhance their sustainability and impact. Some of these benefits include:

1. Enhanced Capacity: Merging with another nonprofit organization can increase the capacity of the merged entity, enabling it to reach more people, expand its programs, and better respond to the needs of its stakeholders. By combining resources, expertise, and networks, merged organizations can achieve greater efficiencies and economies of scale, enabling them to increase their impact.

2. Improved Financial Sustainability: Nonprofit organizations face numerous challenges in generating sustainable funding to support their operations and programs. Merging with another nonprofit organization can provide access to new sources of funding, such as grants, donations, and earned income that were previously unavailable to the individual organizations. Additionally, a merged organization can reduce administrative costs, streamline operations, and eliminate redundancies, resulting in cost savings that can be reinvested in mission-related activities.
   However, the often-suggested option of merging two fiscally fragile organizations is seldom successful. This is not a good solution for a fiscal problem. Healthy organizations have a much better chance of successfully merging to create a new organization which is stronger than the sum of the parts.

3. Greater Geographic Reach: Merging with another nonprofit organization can enable an organization to expand its geographic reach and serve more communities. By combining forces, merged organizations can access new markets, build partnerships with other organizations, and expand their networks, resulting in broader community impact.

4. Enhanced Expertise: Merging with another nonprofit organization can provide access to new expertise and knowledge that can help an organization better achieve its mission. By combining resources, merged organizations can leverage the unique strengths and skills of each organization to develop more comprehensive and innovative solutions to community problems. Plus, the new, stronger organization may be more appealing to the talented people it needs to capitalize on new opportunities.

Challenges of Merging Nonprofit Organizations

While merging nonprofit organizations can bring significant benefits, it also involves several challenges that must be carefully managed. Some of these challenges include:

1. Mission Alignment: One of the most critical challenges of merging nonprofit organizations is ensuring that their missions and values are aligned. Nonprofit organizations often have unique cultures, histories, and ways of working that can create significant differences between organizations. Merging organizations must ensure that their missions, values, and work styles are compatible, and that the merger will not compromise their individual identities or dilute their core values, but instead will enhance their collective impact in achieving their shared mission.

2. Strategic Fit: Organizations should evaluate whether the merger will provide strategic benefits, such as enhanced capacity, improved financial sustainability, or increased geographic reach, that will enable them to achieve their goals more effectively.

3. Organizational Culture: Merging nonprofit organizations can create significant disruptions in organizational culture, resulting in resistance, confusion, and even conflict. Organizations must invest in building a strong culture of trust, transparency, and communication to ensure that the merger process is successful and that the merged organization can continue to operate effectively.

4. Legal and Regulatory Compliance: Merging nonprofit organizations must comply with numerous legal and regulatory requirements, such as tax-exempt status, reporting requirements, and governance rules. Organizations must ensure that they have the necessary legal and financial expertise to navigate these requirements and that the merger process does not compromise their legal or ethical standards.

5. Leadership and Staffing: Merging nonprofit organizations can create significant challenges for leadership and staffing, resulting in redundancies, role confusion, and morale issues. Organizations must ensure that they have a clear plan for staffing and leadership transitions, and that they invest in effective communication and employee engagement to ensure that staff are informed and involved in the process.

6. Stakeholder Engagement: Organizations should engage with their stakeholders, such as staff, board members, funders, clients, and community members, to ensure that they understand the benefits and challenges of the merger and that their concerns are addressed. Communicate transparently about the decision-making process and the reasons and implications of the merger. Obtaining buy-in from stakeholders can grease the wheels for a merger, and open doors that neither party may even be aware of.

Nonprofit organizations may also consider alternative forms of collaboration, such as partnerships, alliances, or networks, that can achieve similar benefits without the risks and costs of a full merger. For example, nonprofit organizations may collaborate on joint programs, share resources, or co-locate their offices to reduce costs and enhance impact. Nonprofit organizations may also join coalitions or networks that promote collective action and advocacy on shared issues. Alternative forms of collaboration can help nonprofit organizations achieve greater scale and impact while maintaining their autonomy and identity. They also can provide a test of how well potential partners mesh, before a merger is started.

Ultimately, whether a merger is a good idea for a nonprofit organizations depends on the unique circumstances of the organizations involved. Nonprofit organizations should carefully assess the potential benefits and challenges of a merger and develop a comprehensive, yet simple and clear plan for implementation and evaluation to ensure that the merged entity can achieve its mission effectively and sustainably.