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Adventures in Philanthropy: To Merge, or Not to Merge?


Funders should support mission-driven partnerships.

Editor's Note: Bruce Boyd is Principal and Managing Director at Arabella Philanthropic Investment Advisors, a national philanthropy consulting firm that works with individual philanthropists, family foundations, institutional donors, and corporations to make their giving more effective. Mr. Boyd leads Arabella Advisors' Chicago office.

The current economic downturn has dealt a devastating series of blows to the nonprofit sector. After expanding from 1 million organizations to roughly 1.5 million over the last decade and nearly doubling its revenues, the sector has endured a drop in public funding, a decline in private giving, and an increase in demand for its services. Barring a miraculous economic recovery, nonprofits now face challenging decisions about how to weather the rest of the storm.

In response to these pressures, nonprofits and their funders are increasingly looking at mergers as a possible tool to help them survive. In a recent survey by the Nonprofit Finance Fund, nearly one in 5 nonprofits reported that they were interested in conducting a merger feasibility analysis, and 5% reported that they were planning to or had already undergone a merger. That 5% is in comparison to an average merger rate of 1.7% in the for-profit sector and 1.5% in the nonprofit sector over the past decade, according to another recent study.

In sum: Mergers are a hot topic and an increasingly frequent occurrence in the nonprofit sector. So, let's take a closer look at the question "to merge, or not to merge?" from a philanthropist's perspective.

To Merge

At their best, nonprofit mergers can help the organizations involved pursue their missions more effectively and efficiently. Mergers can increase an organization's capacity, expand its geographic reach, and open doors to new funding opportunities. While they come with significant up-front costs, mergers can also produce major cost savings in the long run through economies of scale and the consolidation of overlapping services.

In the current economic climate, such savings could be crucial not only to nonprofits but also to their funders. With a 30% drop in foundation endowments, many philanthropists believe that the smaller pool of funding simply cannot sustain 1.5 million nonprofits. They view merged organizations, back-office consolidations, and shared programming as necessary means to leverage their own reduced resources and minimize the loss of needed services.

A handful of foundations have created funds specifically for supporting nonprofit restructuring. Other funders are working to raise awareness and to identify best practices in the field.

Not to Merge

Still, successful mergers are more easily discussed than accomplished. They often depend on an organization's leadership prioritizing the institution's mission above the institution itself. They also often require personal selflessness, since some staff, including executives, may lose their jobs.

Plus, our research shows that nonprofit mergers are most likely to succeed when they occur organically between 2 organizations with strong, forward-thinking leadership. When motivated by financial fears or forced by a donor, they're much more likely to fail.

In the end, financial challenges associated with the downturn may provide an impetus for some nonprofits to have more open discussions -- both internally and with potential partners -- about their future direction. The increase in available funding for restructuring may also lead organizations already considering a merger to take the plunge.

But funders need to remember that nonprofit mergers aren't just about the bottom line. They should remain wary of mergers meant to rescue drowning nonprofits, providing support instead to mission-driven mergers that seek to improve services as well as the bottom line.
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