How to Go About a Non-Profit Merger

Could a merger be right for your not for profit? Will it improve outcomes for the people you serve? Diana Ferner and Malcolm Garrow share some of the questions and steps Social Ventures Australia (SVA) worked through in supporting a recent large-scale merger in the disability sector.

This article is an edited version of a longer article originally published in the SVA Quarterly.

When Andrew Richardson, CEO and managing director of House with No Steps, and Graeme Kelly, CEO of The Tipping Foundation, first started discussing the possibility of a merger, they were both clear on one thing: status quo was not an option if they wanted to continue maximising impact for the people they serve.

Both disability services providers knew they needed to transform—and transform effectively and efficiently—in response to changing dynamics in the disability sector. But was a large-scale merger the right avenue for transformation? And if so, how should they proceed to achieve the best possible outcome for their customers?

This article provides a how-to guide and lessons learned for not-for-profit organisations seeking to explore whether a merger is right for them and if so, how to go about such an arrangement.

Mergers on the rise

With the NDIS creating both a challenge and opportunity to do more for people with disability, disability services providers are increasingly exploring merging. The NDS reports that 38 per cent of organisations are currently discussing a merger with 7 per cent currently undertaking a merger.

While typical rhetoric around not-for-profit mergers in the past suggest that mergers were often being pursued as a last resort (eg due to financial distress), organisations are increasingly recognising mergers as a potential strategic option to turbocharge the ability to do more for end beneficiaries.

When it comes to not-for-profit mergers, the question ultimately boils down to why is it that a merger is the best option to achieve improved outcomes for end beneficiaries?  

A framework for a merger

Drawing on our experience, including most recently with House with No Steps and The Tipping Foundation, SVA Consulting has developed a simple framework to assist not-for-profit organisations considering a merger as a potential strategic option to enhance their impact.

1. Clarify your strategy and your objective

An organisation should first seek to clarify its strategy and objectives, and then consider whether those objectives might be best achieved by a merger or another alternative.

Common objectives and options for achieving those objectives include:

• broaden impact by reaching more people or extending services;
• strengthen or innovate practice;
• improve operational efficiency;
• present a joint case to government, funders, and donors;
• catalyse an opportunity to start blank slate.

2. Define the terms of reference

Before engaging with another party, discuss and define the terms of reference with the board to help ensure alignment on what is or is not on the table, and define guardrails for a potential partner or merger. For instance, are there strong views on how the new board or leadership team might be selected? Probe for specifics where possible. A principle like equality could mean equal board representation, equal leadership representation, and/or equal member representation.

3. Search for a suitable partner

Even if a potential partner has been identified, scan the whole market to ensure no opportunities are overlooked and to identify or validate the best partner to achieve the objectives.

It can be helpful to apply a series of filters. For instance, if an objective is to reach more people or extend services, a reasonable filter is to screen for only organisations operating in complementary cohorts, geographies, or services.

4. Have the “tough conversations” and define the tone

Anecdotal evidence suggests many not-for-profit mergers fall through at the last minute over a disagreement on something like branding. Getting clear on non-negotiables, defining and agreeing key merger principles, and checking for potential showstoppers early with a partner is a good way to check for potential deal breakers early. Plus, this builds some trust before investing too much time and effort.

An independent facilitator can often be helpful to ask the tough questions and facilitate discussions on non-negotiables.

5. Build the merger “business case”

A merger costs time, money, and resources and can be highly risky, so it is important to understand why the merger is better for end beneficiaries. While a not-for-profit merger is not about creating financial upside, a not-for-profit merger “business case” should include the following components:

• strategic rationale and merger vision;
• improvements in outcomes for end beneficiaries;
• financial costs and benefits;
• financial scenario analysis;
• staff, stakeholder, legal, and tax considerations;
• opportunity cost – what could you do otherwise;
• risks and mitigation;
• implementation plan, including resource requirements and costs.

6. Plan and implement the merger

Once the merger “business case” is established and approved, the next step is to conduct due diligence and design the merger if desired.

Both organisations must be sufficiently satisfied with the results of due diligence, where the level of due diligence required depends on the risk appetite of each organisation.

Best practice suggests the following items be clarified at minimum to approve and effect a merger:

• legal structure;
• member approval (for member-based organisations);
• board and leadership selection;
• stakeholder engagement;
• operating model, value capture, and business integration.

Conclusion

A merger is hard and we would caution any organisation against going lightly into one. However, we would equally encourage all organisations to regularly review and consider mergers or other forms of collaboration as a potential strategic option to maximise impact for end beneficiaries.

About the authors: Diana Ferner is a principal and Malcolm Garrow a director with SVA Consulting.