Mergers and acquisitions

Should We Merge?

Merging road sign 2
Merging road sign 2

Recently, mergers and acquisitions have been a hot topic among my clients.  This concept has come up any number of times – almost always suggested by a Board member and motivated by for-profit corporate thinking.  Mergers and acquisitions do serve a purpose, but they are complicated and challenging to execute well in the for-profit sector, and potentially even more so in the non-profit sector.

First – I bristle when the concept comes up as a direct and solitary question, “Should we pursue a merger or acquisition?”  It is my firm belief that this question should only be an execution question to fulfill a strategic direction.  Why do you want to merge?  What goal are you trying to achieve?  Most non-profits run so lean that simply achieving cost savings is not a likely outcome of a merger and, therefore, shouldn't be a primary objective.

Of course, there are many strategic directions where a merger or acquisition could potentially be helpful – if an organization is seeking to build out complementary services, enter a new market, gain access to clients or donors that it can’t reach right now, etc.  And sometimes, foundations or other funders look so favorably on consolidation that they will provide additional support to organizations that are merging.

Having said that – there are a number of challenges relating to mergers that come to mind:

  • Even if two organizations offer similar services to similar clientele, the two organizations may have different models for how to provide their services.
    • Generally organizations have strong beliefs about their models of service, so major differences can be hard to bridge.
    • Fundraising does not often follow a simple 1+1 = 2 equation.  If an individual, foundation, or corporation is giving to both organizations – it is unlikely that they will give the total amount to a combined entity.  (Conversely, mergers and acquisitions can be useful when there is a dominant funder like the government. Working with a larger, combined entity might benefit that funder and the combined entity might be in a better position to capture greater amounts of funding.)
    • Culture fit matters even more in non-profits than in for-profit combinations
      • The Boards need to see eye-to-eye, and feel comfortable and aligned.
      • The staffs must feel that their cultures will mesh.  Oftentimes a non-profit's major assets are its people, and losing those people might greatly reduce the value of the combination.

A straight acquisition might be easier than a merger, as the acquiring organization can define the culture and the service model.  Mergers of two similarly sized organizations can be very challenging and time-consuming to execute. In these cases, true strategic value needs to be clearly identified to make it all worthwhile.

Eight Models for National Expansion

If you are looking to grow your organization on a national scale, make sure to choose the approach that best suits your needs for quality control, brand recognition, and growth. In a recent study by Bikkurim and Wellspring Consulting of organizations who have achieved national expansion, we identified the following eight models. Branch. In the branch model, an organization operates in different locations (or branches) under a single legal organizational entity that is overseen by a central headquarters. While national brand recognition can be strong, with consistent control of quality across all locations, this model requires comparatively high costs and staff time at the central office. The organization's growth rate may be limited by a need to raise money for funding and management capacity at the central headquarters.

Franchise. A franchise model is similar to a branch model except that operations in different locations are separately incorporated entities. Each entity has the same name and brand, and franchisees are legally bound to use the brand and deliver programming consistently, leading to higher quality control.  In the nonprofit setting, franchisees may be organized groups of volunteers who must abide by the organization’s protocol and are often called “chapters." Growth comes from adding new franchises and depends on the appetite of the originating organization and the availability of talent to lead franchises.

Affiliate. In the affiliate model, organizations with similar missions affiliate with a central originating organization. Affiliates may have different, but related, names and brands from the originating organization and other affiliates. The originating organization supports affiliates with a proven program approach. Quality may not be as consistent across affiliates because each affiliate is its own entity. Growth occurs through enrolling new affiliates and depends on the funding and management capacity of the originating organization.

Program Codification. In the program codification model, growth occurs when an originating organization codifies a program approach and provides this codification to other organizations. Such codification ensures that a program is delivered in a way that is faithful to the originating organization’s proven approach. This may include pre-packaged program materials, directions for instructors, videos, evaluation forms, etc. These materials may be accompanied by consulting. Since organizations using a codified approach may not publicize their ties to the originating organization, program codification is unlikely to support national brand recognition. At the same time, this approach offers a relatively low-cost way to grow the use programmatic content.

Dissemination. In the dissemination model, an organization shares ideas or new methods that it has developed with others, though the ideas have yet to be codified. If an idea or method is widely adopted by others, the potential growth rate is high despite the low-cost nature of this approach. However, the user is unlikely to publicly credit the originating organization, so for the originating organization national brand recognition and the ability to control program quality are both low.

Network. The network model is similar to the dissemination model in that ideas or methods are shared without codification, but it places more emphasis on webs of relationships and an open flow of information. The network model relies on leveraging connections between users who may or may not be connected to the originating organization. Some in the chain of transmission may use the idea or program being shared while others may simply pass it along. The idea or program may also be changed by users who communicate their changes through the network. As in the dissemination model, the cost to the originating organization is low, as are brand recognition and quality control, but the growth rate is potentially high.

Merger. Mergers can achieve growth by combining organizations with similar missions. A single-city organization with a highly effective program may decide to merge with a national organization seeking to deliver that program in new places. Mergers are effective when each organization adds something from which the other organization can benefit, and when the organizations have similar missions and compatible cultures. While a merger can lead to rapid programmatic growth, programs may need to be re-branded and may lose autonomy.

Partnership. Growth via partnership occurs when two organizations see an opportunity to increase their impact by working together. Partnerships can allow the participating non-profits to gain efficiency while maintaining independent authority over their programs. The two groups may work together informally or form a legal relationship, and the partnership may be temporary or long-term. As with a merger, a partnership is most effective when each organization brings something that the other organization can benefit from, and when missions and cultures align. Since each partner maintains its own brand and quality, partnerships can be a low risk way to expand, however successful upkeep of the relationships requires time and effort.