In my experience, nonprofits of all types, from charities and foundations to trade associations, professional societies, and higher education institutions, appear to be exploring mergers at an increased pace. This makes sense as the marketplace continues to rapidly evolve and organizations focus on meeting the needs of their members, donors, students, and stakeholders. A potential merger can look excellent at first. The missions align. The leaders get along. On paper, the combined organization appears stronger, with obvious efficiencies, complementary capabilities, and a compelling story to tell the board and stakeholders.
The parties start falling in love with the topline benefits. It’s really at this point that judgment is at risk of slipping.
Once people become invested in an opportunity, the benefits tend to harden into facts, and the challenges soften into details someone will solve later. Financial assumptions may receive less scrutiny than they deserve. Governance disagreements may be minimized as details. Cultural differences are expected to disappear once both organizations are working toward the same mission.
The potential merger’s momentum becomes its own argument.
The process sometimes shifts from testing the transaction to confirming it. Instead of asking whether the combination works, people begin looking for reasons it should.
That said, there is a path forward to help guard against this.
A well-run merger process creates checkpoints where the parties must step back and test the transaction on its own terms:
- What problem are we trying to solve?
- Is a merger the right structure?
- Which assumptions must be true for the combination to succeed?
- Where will governing and leadership authority sit after closing?
- What would cause us to restructure the deal or walk away?
These questions sound straightforward. In my experience, they are not. By the time organizations begin using the word “merger,” many leaders may already have started imagining the combined institution, discussing leadership roles, or presenting the opportunity informally to key stakeholders. The transaction develops into an emotional attachment before anyone has tested whether the proposed structure is the best way to achieve the objective.
Start with the problem
Much of my early work with boards and chief executives considering a combination happens before drafting a single document.
We help define the problem(s) the organizations are trying to solve, test whether a combination can solve it, and compare the available structures.
Perhaps one organization needs leadership succession. Another may need access to technology, fundraising capacity, administrative infrastructure, geographic reach, or a stronger balance sheet. Two organizations may serve overlapping constituencies and believe they can produce more impact together.
A statutory merger may be the right answer. It may also be more permanent, expensive, and disruptive than the objective requires.
An affiliation, shared-services arrangement, program transfer, joint venture, management agreement, or parent-subsidiary structure may accomplish much of the same result while preserving flexibility.
Counsel brought in after the structure has been selected can document the transaction. Counsel involved earlier can help determine whether it is the right transaction at all while keeping a close eye on the goals and objectives of leadership.
Sometimes the strongest result is indeed a merger. Sometimes a lighter arrangement advances the mission with less cost and risk. The point is to reach that conclusion through analysis rather than momentum.
Keep testing the assumptions
The testing cannot happen at only one point in time.
It should begin before the parties start circling a potential structure and continue as the due diligence develops. This is why we build diligence around the assumptions on which the deal depends rather than treating diligence as a document-collection exercise using standard forms. No two mergers are alike and the diligence should reflect that.
Suppose the rationale for the transaction is that one organization brings a valuable program and the other brings the infrastructure to scale it. Diligence should test whether the program is financially sustainable, whether the organization owns the necessary intellectual property, whether important contracts and grants can be transferred, and whether the people who make the program work will remain after closing.
If the expected value lies in technology, diligence should examine the actual condition of the systems, implementation costs, data rights, vendor dependencies, cybersecurity exposure, and the practical difficulty of integration.
If the transaction depends on cost savings, the parties should determine whether those savings are real, how quickly they can be achieved, and what investments will be required before they appear. Many times, cost savings can be a mirage when considering transition costs and other factors.
If the case rests on leadership continuity, the parties need to address the combined leadership structures and whether the proposed structure will serve the needs of the organization after the initial transition period.
The role of diligence is to determine whether the assumptions are supportable, whether the risks can be managed, and whether the deal still makes sense once the organizations understand what they are combining.
Problems identified at this stage can still change the terms, the structure, the integration plan, or the decision to proceed. After closing, those same problems are usually harder, more expensive, and more disruptive to solve.
Treat governance as part of the deal
All too often, governance issues are described as matters to be worked out after the parties agree on the strategic case to combine. That is usually a mistake.
In nonprofit combinations, governance and control often take the place that purchase price occupies in a commercial acquisition.
There are no shareholders receiving the proceeds. The difficult negotiations instead concern who will lead, how the board will be constituted, which organization will survive, which name will continue, what programs will be protected, and where decision-making authority will sit.
These are not secondary details. They determine whether the combined organization can function.
I have seen transactions become significantly more difficult because the parties delayed these discussions in the name of preserving goodwill. By the time governance was addressed, each side had developed different assumptions about what the combined organization would look like.
Equal board representation may sound fair, but it can produce a board divided into predecessor camps. Reserved powers that reassure a party before closing can leave management navigating overlapping authority afterward.
A serious process brings these questions to the forefront early enough for the parties to work through them honestly.
Give the board a decision it can evaluate
The board should see the results of this preparatory strategic alignment and diligence work before it is asked to approve anything.
A merger presentation often emphasizes mission alignment, anticipated efficiencies, and the strategic opportunity. Those points are important, but also table stakes for a merger discussion. They can be true and the ultimate union can still fail.
Before voting, directors should understand:
- The problem the transaction is intended to solve
- The alternatives considered
- The assumptions supporting the proposed combination
- The material financial, operational, and governance risks
- The authority the board will retain or surrender
- The principal integration challenges
- The oversight and accountability measures that should be established
- The conditions that could still change the recommendation
In my work with clients navigating mergers, the key strategic assistance as an advisor is to translate the strategic, legal, financial, governance, and diligence work into a decision record the board can actually use.
A useful record gives directors a clear account of the rationale, alternatives, assumptions, unresolved issues, and protections built into the deal, without burying them in transaction documents. Information is provided in a neutral, transparent, and honest manner so that the difficult deliberations can be had before anyone signs on the dotted line.
That record supports informed decision-making and, in my experience, typically produces a better transaction. It provides a framework to encourage the parties to articulate what they believe, what they know, what remains uncertain, and why proceeding is still in the organization’s best interests.
Stay willing to change course
The hardest part of merger process discipline is maintaining the willingness to change direction after time, money, and credibility have been invested.
Leaders often worry that restructuring the deal will signal weakness or bad faith. They may fear disappointing the other organization, their boards, funders, or employees. Once an announcement appears likely, walking away can feel like failure.
It is not and those expectations can be set from day one in the process.
A decision to change the structure, slow the process, impose additional conditions, or stop the transaction may be evidence that the process worked.
The real failure is proceeding because too many people have become emotionally or professionally invested to ask whether the original purpose of the combination still holds true.
The merger evaluation process prevents enthusiasm from displacing sound judgment and evaluation.
A strong merger should survive hard questions. When it does, the scrutiny has not weakened the transaction. It has given both organizations a much better chance of building something that grows and flourishes after the merger has been completed.
Dan Liutikas is an attorney with more than 25 years of experience representing tax-exempt organizations, including public charities, trade associations, professional societies, and credentialing bodies. He is the founder of Org Law, a boutique law firm serving mission-driven organizations.
Org Law advises nonprofit boards and executives through every stage of a combination, from structure selection through post-closing integration. If your organization is exploring a merger, the most valuable conversation happens before the form of the deal is set. Start that conversation at orglaw.com/contact.