Facilitating Mergers and Acquisitions for Nonprofits

American idealism, combined with our strong individualism, generates new ideas and businesses like no other country. We also start the most nonprofits.
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American idealism, combined with our strong individualism, generates new ideas and businesses like no other country. We also start the most nonprofits.

Defying reality, and perhaps because of the recession, Americans started new nonprofits 50 times faster than small businesses over the last decade and nonprofits also outpaced businesses in the percentage growth in hiring, wages and contribution to the GDP, according to the Urban Institute. Today in Los Angeles County alone, there are more than 31,000 nonprofits.

Everybody agrees there are too many nonprofits. I have heard many funders complain about the duplication and inefficiencies in the nonprofit marketplace, as redundancy can diminishes the prospect of ending homelessness, boosting high school graduation rates or reducing obesity, etc.

Unlike their for-profit brothers and sisters, nonprofits have virtually no true market forces to keep them in check, outside of their ability to fundraise. The resources and space for nonprofits to merge, combine forces or just go out of business is absent. In the private sector, there are investment banks, law firms and other specialists dedicated to restructurings, mergers and "workouts."

One strange factor I have encountered countless times is the nonprofit boards of the nonprofit organizations also see these opportunities to merge and partner, but fail to act. Having sat on all types of boards, I've seen the smartest business people in the world go into a nonprofit board meeting and lose their business acumen--treating nonprofit board service like a hobby instead of a fiduciary obligation. Nonprofit board meetings sometimes make smart businesspeople dumb. But I digress...

Several L.A. foundations got together and decided to do something--something different: provide a funded, safe space to facilitate nonprofit restructuring to increase efficiencies and maximize impact. What started out as an experiment may become the largest-ever mergers and acquisitions program for nonprofits.

The California Community Foundation, along with the The Ralph M. Parsons Foundation and Weingart Foundation, explored the idea of supporting mergers and acquisitions in the L.A. nonprofit arena in mid-2012. We invited executive directors and board chairs to a meeting to hear from David La Piana, whose firm has presided over 250 nonprofit restructurings and mergers. We wanted nonprofits that were serious about this process, and we made attendance by the board chair mandatory. We expected a couple dozen nonprofits to show up.

Three weeks later, it ended up being one of the largest events for nonprofits in Los Angeles, with more than 700 attendees and 300+ organizations! We were shocked at the pent-up demand for this topic. The attendees urged the funders to continue the exploration by establishing a process for funded restructurings-not just mergers, but administrative consolidations and other forms of strategic partnership as well.

Fast forward to today, we have 12 funders in what we call the Nonprofit Sustainability Initiative (NSI), where 25 partnerships involving 66 nonprofits have completed or are in the process of restructuring negotiations. The NSI funders are entering their fourth year of collaboration, and interest in this work has not waned.

NSI provides a neutral table for willing partners to explore the various stages of formal long-term partnerships, from shared back offices to full mergers. The NSI partners provide the funding for the facilitator, the lawyers, financial consultation to severance packages if necessary, etc.

In other words, we give willing nonprofits a chance to restructure.

Restructuring for Good: Case Study

I recently talked to the principals of a merger that resulted from a negotiation supported through the NSI. The organizations were P.S. ARTS and Inside Out Community Arts. The staff and board leadership were friendly and open to a range of restructuring options, from joint programming to merger. These two groups came to the conclusion that a merger made sense. Now what?

I spoke to Dr. Kristen Paglia, the current CEO of the newly-merged P.S. ARTS; Amy Shapiro, the former co-executive director of P.S. ARTS; and Varina Bleil, one of two executive directors from Inside Out Community Arts before the merger.

Paglia told me both organizations had nearly identical missions and compatible audiences: "P.S. ARTS served the K-5 segment and Inside Out served middle schools. From a student continuum perspective, it was a no-brainer."

"We were being acquired and we would lose a few jobs, but we all kept our eye on the reason why we were doing this--to serve more kids," said Bleil.

Like all mergers, cultural integration is critical and can be the most challenging aspect. These organizations had similar missions, but very different roots and cultures.

Shapiro says the merger was one of her proudest professional achievements and helped "make the organization stronger by taking the best of both cultures."

Bleil agreed, saying the merger made their culture better: "We were able to combine our grassroots family culture at Inside Out with the bigger, more professional culture of P.S. ARTS."

Most interesting to me, is all of them are advocates of nonprofit restructurings now. The bottom line is, the newly combined P.S. ARTS is culturally and financially stronger after the merger.

Lessons Learned

So far, we have learned a few lessons from NSI, including:
  • Funders can play a key role in facilitating and funding restructuring opportunities for willing partners.
  • A neutral third-party facilitator is essential to the process.
  • We are changing the perception that "strategic restructuring" and "mergers" are partnerships of "weakness" or "last resort."
  • Funders should be flexible and manage the uncertainty of the process.

Despite the benefits we've seen, the reality is that organizational restructuring is an idea that rarely gets traction. Informal discussions about mergers and deeper collaborations should be bolstered by funders who provide the needed space to have honest conversations that confront the financial, human and technical realities, challenges and opportunities.

The culture within the nonprofit sector has generally enabled a status quo of scarcity and starvation. Even the name "nonprofit" is anchored in deficit logic. If we want a more efficient marketplace, funders and nonprofit boards need to pay for strategic restructurings--including mergers--instead of just paying lip service.

After all, if we don't work together in new and better ways, we will continue to struggle to make a difference.

John E. Kobara is Executive Vice President and COO of the California Community Foundation. Follow him on Twitter @jekobara.

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