Non-Profit Mergers: It’s Time to Close. Now What? Beyond Planning & Due Diligence
Last month, we talked about the initial considerations of a non-profit merger, as well as the critical due diligence phase. After finding unity of purpose, reflecting on the relevant issues and deciding that a merger aligns with your goals and mission, you engaged in an extensive due diligence process, examining all legal, financial, logistical, and human resource documents and processes. At the conclusion of due diligence, the board of directors of each organization developed and approved a Plan of Merger consistent with applicable state laws. At long last, after months of preparation, meetings, discovery, approvals, and planning, the time arrives for merger implementation. Essentially, it is finally time to close the deal. However, this is only the beginningof the end.
As with the previous phases, planning and organization are crucial for a successful implementation. While it would be nice if we could sign on the dotted line and all issues magically resolve, we know that is not the case (it never is!). This process, like the others, will take time, patience, and an in-depth understanding of the logistical steps that must be achieved to effectuate the merging of two different organizations. The following checklist can be used as a guide through the final steps of the merger.
1. Appoint a Merger Transition Team. This group of three to six individuals will spearhead each logistical step of the merger. They will assign tasks, set timelines, and keep the merger moving forward at a reasonable pace for the new nonprofit.
2. File Appropriate Documents with the State. Each state has its own requirements for filing with regard to non-profit mergers. All documents should be filed with the state of organization/incorporation, following those particular guidelines and requirements. Note that although the merger is legally completed once the state accepts the documents as filed, many more steps must be taken for actual completion.
3. Develop Integration Plan. Due diligence should have previously identified duplicative positions, departments, and resources. This plan will identify what is being removed and what is surviving in the new organization. The plan should also identify any issues in the short-term due to the merger and provide for analysis at one month, three months, six months, and twelve months.
4. New Board of Directors Established. The new board generally consists of previous board members from each of the non-profits prior to merger, but can be entirely new. They should establish their new meeting schedule and implement new by-laws as soon as possible.
5. Schedule Employee and Volunteer Training. How will the new departments, responsibilities, and tasks differ from the previous ones? What do employees and volunteers need to know about the mission, vision, and day-to-day operations to effectively perform their duties?
6. Determine Human Resource Needs. Establish a new payroll system, health benefits, vacation and sick pay, and hiring and termination protocols.
7. Finalize any Facilities Management Issues, Vendor Contracts, and Insurance Coverage. What contracts need to be rewritten in the new organization’s name? How will insurance coverage transfer without lapsing?
8. Develop Communication Plan. This plan should involve internal and external communications and ensure consistent messaging throughout. This may include the launching of new branding, the name and logo, and a marketing campaign. The new website and social media accounts must also be established and maintained.
9. Finalize Financial Transactions. Transfer assets, close and open accounts, as needed, and integrate accounting systems.
10. Implement Technology Solutions. How will technology, phone systems, and databases be integrated? What is still required? What can be eliminated?
While the entire process can take between twelve and eighteen months, depending on the size of the organization, this Closing Checklist enables the Merger Transition Team to keep the merger on track, heading toward a successful completion.
Need more assistance? Barker Associates has extensive experience working with non-profit organizations as they implement and finalize mergers. If you are considering this strategy, use this link to my calendar to choose the best time for a free 30-minute consultation.
You Have Unity of Purpose, but What about Unity of Numbers? The Importance of Financial Due Diligence in Non-Profit Mergers
Last week, we talked about the initial considerations of a non-profit merger. Once you’ve reflected on the relevant issues and made the decision that a merger aligns with your goals, donors, board members, and mission, it is time for the next phase of the process – engaging in due diligence.
In the scenario of a non-profit merger, due diligence has three primary functions:
1. Minimizing the risks associated with joining two separate organizations to further a common mission;
2. Providing clear insights into each organization’s interests; and
3. Improving the timeframe of the merger by reviewing the relevant documentation and processes, and identifying any challenges sooner rather than later.
Due diligence is conducted by thoroughly inspecting all aspects of the organization with which you plan to merge your own non-profit. The entire due diligence process consists of numerous categorical reviews, including legal, contractual, employment, operational, financial, tax, real property, physical property, intellectual property, and human resources, among others. However, for our purposes, we will focus only on financial due diligence.
Financial due diligence provides an opportunity to analyze potential savings with regard to the overhead of the combined organizations. With this full and complete knowledge, the approving Board Members will have the ability to examine the overall benefits of the merger.
The Financial Audit Checklist
Before you can merge with another non-profit, you must possess a clear understanding not only of its current financial status, but also of its financial history. You must have the ability to answer questions such as: What resources will be available moving forward? And what obligations will remain?
Financial due diligence will include a review of the following:
Audited Financial Statements for at least three years
Annual Budgets, Projections, and Strategic Plans for at least three years
Debt and any Contingent Liabilities
Grant level financial results
Fixed and Variable Expenses for at least three years
Depreciation/Amortization Schedules and Methods for at least three years
Accounting Methods and Strategies
Any Investment Policies
Employee listing with position and annual salary
Detail list of larger donors
While non-disclosure agreements must be executed prior to any due diligence occurring, many organizations have valid confidentiality concerns as they relate to financial reviews of internal documents. As one possible solution, some organizations choose to move forward in a phased approach. In doing so, they leave the disclosure of the most sensitive data and documents to the end of the process.
While each situation will be different, and financial due diligence may vary slightly, it is essential to build a foundation for success. Not only are you protecting the non-profit itself, but also the individual board members and donors involved. Each non-profit should conduct its own independent due diligence, as well as joint due diligence to maximize information and minimize risks. By taking both a historical approach and a forward-looking approach, you will gain an incredible amount of knowledge. And with more knowledge, comes the empowerment to make the best decision for your non-profit.
Barker Associates has extensive experience working with non-profit organizations as they prepare for, and go through, a merger. If you are considering this strategy, use this link to my calendar to choose the best time for a free 30-minute consultation.
We have learned many definitions
related to essential in 2020. The interpretation of essential has been heavily
debated, including discussions over golf courses, liquor stores, restaurants,
and bars. As communities open up, these debates are getting more interesting as
the discussions center around who is allowed to be open.
My favorite debate about “essential”
is the one where the attorneys representing Elizabeth Holmes, the Founder and
CEO of Theranos, appealed to the court that they should be considered essential
and allowed to meet at the office to work.
Pre-COVID, one meaning of “essential” described
having the right infrastructure in place if a company wanted to raise capital. The
right infrastructure is critical to generate the data about your business during
the due diligence process with potential investors.
Here are a few examples of why this is
Revenue projections will be a key
component of what the investor will look at when evaluating the business. The
revenue in the projected income statement for the prior year probably
represents an increase in the revenue over the current year. The investors will
ask questions like: “How long does it take you to close a deal from the time
you speak to a customer to close?” “How many deals do you have in the pipeline
now?” “What is your customer churn rate?” “How do you charge customers – as
SaaS, by transaction?” etc.
These questions will be asked during
the initial discussion as well as during the presentation. Whatever answer you
give, if the due diligence moves forward, must match the data in the general
ledger, CRM (Customer Relationship Manager data base) and other systems.
I have known a C Suite executive
falsely stating things like they have never lost a customer or they close a
deal in 30 days. But when we drilled down on the historical data his statements
are not supported by facts.
I have also experienced a C Suite
Executive who stated that the projections were high because “that is what we
need to close this deal.” False information may get the attention of a
potential investor but it will not keep their attention when they drill down to
the “essential” infrastructure and claims are not backed up by facts.
Burn rate – potential investors will
ask what your burn rate is, i.e. what is the amount of cash the company
requires each month. Burn rate is based on the cash leaving the checking
account – not the pretax income. These are two different calculations and often
commingled into one number for companies. If the C Suite executive states the
monthly burn rate is $10k because that is the best guess he has during an
investor presentation, but the historical cash spend is $15k per month, the
investor will lose trust and the company seeking investment will lose
credibility. Best guess does not get the job done.
buyers are looking for infrastructure that can help them identify, track,
measure and report on a broad range of externalities. Being able to demonstrate
actions taken to date, along with a path forward that helps buyers envision how
the company can help address or mitigate global challenges and serve societal
needs, can help them think more expansively about opportunities for creating
In their article, the E&Y authors
are directing their advice to Private Equity Firms to emphasize the importance of
creating value for portfolio companies the PE may want to sell. The quote above
supports my assertion that adequate infrastructure is essential for
companies seeking investment.
You may say to yourself, I will build
the infrastructure when I am ready to pitch to investors – we are not ready
right now. If you have the ability to influence decisions about company spend,
it is your fiduciary responsibility to insist the company has the right
infrastructure. Not only will it position the company to prepare for the future,
it will guide the entire management team in making the right decisions day to
Let’s dive into your essential infrastructure concerns – click here to set up a 30-minute free consultation to discuss your unique situation.