Don’t merge with cost reduction as the main goal.
In the for-profit world, efficiency and cost savings are often primary drivers of corporate mergers. Not so much in the nonprofit world. Most businesses operate in a “fixed demand” world where they are mostly competing for a larger share of the relatively fixed market for their product or service, so constantly driving operating costs down is critical to profitability and mergers can often help. But most nonprofits operate in environments where they and their peer organizations will never be able to fully meet the needs their missions call them to meet (virtually “unlimited demand”), so a dollar saved via a merger is really just another dollar available to invest in growing services to address more needs.This is not to say that mergers should ignore cost reduction (e.g. eliminating duplicate senior staff positions, duplicate office leases, etc.) as one element of the business case for merging; they absolutely should. But expecting that a merger will result in a combined new budget that is less than the sum of the two pre-merger organizational budgets is ignoring the fact that more people usually need nonprofit services than are able to access them. Enhanced operating efficiency, which leads to more dollars dedicated to direct programs and services, should be the real goal.
Don’t merge simply because a funder says you should.
In our experience, the most important stage in a potential merger is the “dating” stage where each organization is diligently seeking to determine “if” a merger is the right thing to do, not “how” or “when.” That stage should involve a good deal of due diligence, analysis, and key stakeholder input (which is best gathered very quietly and confidentially). And it can be easy during this stage to let the views of a single funder, particularly an influential one, to disproportionately sway the discernment process. Nonprofits and their boards are sovereign entities (usually), and they need to make decisions based on what is the best thing for achieving their mission and for their organization.Soliciting key funder’s perspective on a potential merger can be completely appropriate and even beneficial, especially if that funder can commit to funding the costs of the merger and even to continuing the fund the merging organization(s) at the same or higher levels post-merger, but a funder’s support of a merger should only be one fact among many in a nonprofit making the final decision to merge.
Don’t merge to rescue a failing nonprofit.
For some reason in the nonprofit sector many have developed the opinion that nonprofits should not be allowed to fail because, after all, they are all doing such “good things.” Poppycock. Nonprofits, like businesses, often need to fail. In fact, most small businesses do fail within the first few years of startup, but most nonprofit don’t (largely because of the lack of truly transparent information about a failing nonprofit’s health and real impact, or lack thereof). Stronger organizations who look at a peer, weaker organization that may be at risk of failing often see merging with (or really acquiring) that nonprofit as a great way to serve the community, save jobs, preserve services, and even possibly to grow their own impact. And in some cases, this rationale may be sound.But in most cases, a failing nonprofit is failing for a variety of infrastructural, business, cultural, and leadership reasons, most of which a simple merger will not solve. Instead, a stronger nonprofit should consider in such cases agreeing to acquire the viable pieces and programs of a failing nonprofit which might independently be valuable to the stronger organization, and letting the rest of the liabilities, weak aspects, and even under-performing staff go asunder. Nonprofits can stand to steer away from the kumbaya view of nonprofit existence and instead embrace a little more of the “survival of the fittest” philosophy – our clientele and funders deserve it.