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You Have Unity of Purpose, but What about Unity of Numbers?

You Have Unity of Purpose, but What about Unity of Numbers? 
The Importance of Financial Due Diligence in Non-Profit Mergers 

Mindy Barker | Barker Associates

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 
  • Accounts Receivable 
  • Accounts Payable 
  • Fixed and Variable Expenses for at least three years 
  • Depreciation/Amortization Schedules and Methods for at least three years 
  • Outstanding Liens 
  • Accounting Methods and Strategies 
  • Any Investment Policies 
  • Account Standings 
  • Employee listing with position and annual salary 
  • Organization Chart 
  • 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.

It May be Time for Non-Profits to Consider a Merger

It May be Time for Non-Profits to Consider a Merger  
A Possible Solution During Impossible Times  

Mindy Barker | Barker Associates

The profound effects of the COVID-19 pandemic will be felt for years to come in all aspects of our lives and businesses. However, non-profit organizations have faced, and will continue to face, their own set of unique challenges. Overall closures, increasing unemployment, a lack of feasible projects, and the cancellation of fundraising events have combined to result in sizeable shortfalls with regard to funding. 

To navigate through these trying times and ensure success moving forward, non-profits need effective solutions. One possible solution they may consider in 2021 is a merger with another non-profit. And the time to consider this course of action is now – prior to it being needed. Too often, there is an inclination to only consider mergers reactively because, for example, the organization needs financial help. However, the best time to consider it is proactively, as an effective growth strategy. When considered proactively, the advantages and disadvantages can be examined on a more rational, analytical basis instead of an emotional, biased one. 

As with any transition, challenges will be present. Questions to explore may include: 

  • Do you have enough knowledge about mergers and the due diligence required to effectuate one?  
  • Is there enough funding for the process?  
  • Do you know a facilitator to help explore merger options?  
  • Does either non-profit have government contracts in their name for a specified amount of time? 
  • Do you have too much of a personal connection to the non-profit mission and vision to examine the option clearly? 
  • Do you perceive a merger being a failure? 
  • Are you concerned about losing employees? Or the organization’s culture? 

There is no doubt that these are valid questions and considerations that must be examined. Yet, they should not undermine the significant advantages of mergers for both organizations involved, including: 

  • Increased resources – Instead of purchasing new equipment, leasing new space, or hiring new employees, a non-profit can gain all the resources needed through a merger. 
  • Decreased expenses – Each organization has its own expenses, many of which will be duplicative. Once merged, those expenses will decrease. 
  • The ability of each to meet the needs of the other – Each organization has its own strengths that will often compensate for the other’s weaknesses. 
  • Effective growth strategy – Combined resources coupled with decreased expenses will result in an increased probability of growth. 
  • Furthering mission – Oftentimes, with a merger, the reach of the non-profit will expand due to the increased resources, enabling its mission to have a more significant effect. 
  • Better positioned to achieve goals – With more resources and further reach, the organization will have the ability to focus on, and work toward, reaching its goals.  
  • Greater probability of long-term sustainability – With a more effective growth strategy, there will be a higher chance of long-term sustainability and success.

After thoroughly examining the challenges and the advantages of a merger, the following questions should be considered:  

1. Can you look at a similar organization as a resource, and not as competition?  

2. Can you determine the ways in which you are similar and the ways in which you are different? 

3. Can you envision what working together would look like? 

4. Could combining resources, leadership, and operations work in both your favors? 

5. Which name should survive (considering government contracts, if applicable)? 

6. Are you prepared for extensive due diligence? 

Mergers are viable solutions for non-profits, whether due to funding needs or the desire for an effective growth strategy. In either case, through a merger, the strengths of each can be leveraged for a common goal. Over the next several weeks, we will explore a variety of topics related to non-profit mergers, including due diligence, closing items, and integration considerations.  

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.