The Lowdown on Nonprofit Mergers
posted Nov 3, 2017 by Patrick Martin, CPA in the Mission Matters Blog
Though not-for-profit mergers do not happen frequently, there are instances where joining forces provides greater benefit than sticking it out as your existing individual organization. If your organization’s mission matches another’s and you could benefit from banding together, a merger might be the right decision. There are certain risks involved with nonprofit mergers, which you will want to know before you go about changing the structure of your organization.
What is the difference between a merger and an acquisition?
Mergers happen when one organization joins with another to create a separate entity. With an acquisition, one organization incorporates the other into its charter, and thus absorbs it, so to speak.
What causes organizations to merge?
Same mission, same objectives- If you and another organization are united in the same mission and are tackling the same cause with the same basic objectives, it might make sense to join forces in order to ultimately achieve that united mission.
Competition- One organization might have trouble competing financially with a larger organization. By banding together, the organizations can accomplish more at a lower overall cost.
Reputation- If an organization has a damaged reputation, it might be difficult for them to recover their image. In this case, an acquisition allows the organization to grow and evolve under the umbrella of a new organization.
Are there any risks involved in mergers/acquisitions?
There are potential risks involved with joining forces with another organization. This includes:
- You could end up inheriting financial issues from the other organization. An organization might be looking to merge with yours because of financial issues.
- You could find that your organization and the joining organization are in fact not working towards the same mission, or working in a way that does not complement the other.
- The executive director of one organization might be forced to leave.
- If you cannot combine the two boards, you might have to select only a few board members from each for the new board.
The Financial Accounting Standards Board (FASB) proposed guidelines regarding not-for-profit mergers and acquisitions to help with overall consistency. FASB hopes that organizations will fully disclose information that will help professionals analyze the financial effects of organizations uniting. Under these guidelines FASB proposes that:
- Two organizations can unite when one organization owns more than 50% of the other entity’s outstanding voting stock.
- Two organizations can merge when one organization controls a majority of the voting interest of the other governing board and has an economic interest in the entity.
- Organizations should not “pool” interest.
- On the acquisition date, assets and liabilities should be measured at their fair market value.
- Any assets or liabilities acquired by the merger or acquisition should be identified.
- Goodwill or gifts should be realized on the basis of the value of acquired assets, liabilities assumed, and any other consideration received.
Are you thinking a merger or acquisition might be right for your organization? Your accountant will be able to evaluate your individual situation and assist you in the process, which involves its share of complexities.
Questions? Contact any member of our Not-For-Profit Services Team.