In the past few years, there has been a significant increase in not-for-profit mergers. This is largely due to a perception from some funders that bigger is better. However, a merger is not something that an organization should enter into lightly. The key to a successful merger is to perform your due diligence well in advance. Not-for-profit management and boards should take the following steps:

  1. Critically evaluate your organization’s reason for considering a merger. What are the benefits to be obtained from a merger? Is the purpose of the merger to improve the services that you currently provide or to expand into a new service line? Is the organization merging with another entity to obtain referrals to existing programs? Is the merger necessitated by cash flow needs?  Having a clearly defined purpose for a merger is imperative.
  2. Successful not-for-profits stay true to their mission. Review the missions of both organizations. Are the missions compatible or complimentary?
  3. Assess what the organization will look like post-merger. Who will be the leaders of the merged organization? This should include who will comprise the executive team within the newly created organization and the executive committee of the newly created Board, as well as the make up of the new Board. How will various leaders operate together? Often organizations begin the path to a merger investing time and resources only to discover that the two Boards cannot agree on who will be the leaders of the merged organization and how the programs will operate resulting in the merger falling apart.
  4. Evaluate the financial strength of both organizations. What are the assets to be obtained and liabilities assumed with the merger? What will the impact of the merger be on the merged entity’s financial strength?  This should include both the potential reimbursement rate impact, if applicable, on both organizations as well as the impact on service volume. It should also include addressing compensation and benefits structures. Will the merged entity need to significantly increase compensation and benefits, change benefits currently offered, or change benefit plan options? 
  5. Because of the proprietary and sensitive information that is shared during merger discussions, a non-disclosure agreement should be used to protect confidential organizational information.
  6. Make sure you speak with your audit firm. Accounting rules with respect to tax-exempt mergers are complicated. It is important for management and the Board to understand the financial impact on the newly created organization.
  7. Another critical step, that is often overlooked, is the evaluation of the cultures of both organizations. Things that may seem insignificant at first glance are very important such as, how people dress at work, who gets an office, or how office celebrations are handled. These are all things that make up the culture of an organization. A merger will not be successful if the cultures of the organizations do not fit together.
  8. Before going down the path to a merger, ask yourself if your organization can afford a merger? Potential costs of a merger not only include legal and accounting fees but also rebranding costs, moving costs, technology costs and possibly severance packages for staff that may not continue with the newly formed organization. There is funding available from various foundations to help with these costs.
  9. Become familiar with the legal requirements of a merger. New York State requires not-for-profits to write a proposed plan of merger that will be reviewed by the Attorney General. The organizations will need to obtain the services of legal counsel that is knowledgeable in this area. The New York State Charities Bureau has published an easy to use guide entitled “Guide to Mergers and Consolidations of Not-for-profit Corporations Under Article 9 of the New York Not-for-profit Corporation Law”. This guide walks through the legal and statutory requirements of a merger and provides sample petitions to be filed in order to complete a merger. This guide can be found at www.charitiesnys.com/pdfs/mergers_and_consolidations.pdf
  10. Plan for the merger well in advance.  These transactions take a lot of planning.  Your management and Board should allow time for proper vetting and review of all phases of the transaction.  In addition, you will want to make sure all of the appropriate details are communicated to all of the stakeholders including employees, donors, consumers, funders, etc.

It is imperative that your organization performs its due diligence when contemplating a merger. At the end of the due diligence process, both organizations should have a solid understanding of the impact of merger and be able to make an informed decision.

Bettina Lipphardt is a partner based out of our Syracuse, NY office.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.


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