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.

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