Mergers & Consolidations If a nonprofit is facing an uncertain future, a merger or consolidation may be one way to ensure a threatened organization's survival, and may provide the opportunity for valuable programs to continue.
Carolyn McLaughlin, Executive Director of Citizens Advice Bureau, provided attendees at NPCC's Fall 1996 Member Reception with a compelling account of her organization's merger with the Girls Club.
History of the Organizations
Citizens Advice Bureau (CAB), began in 1972 as a Bronx-based store-front crisis intervention center. It gradually expanded into a multi-service settlement house committed to improving the economic and social well-being of low income Bronx residents. It provides services ranging from senior citizen centers to homeless outreach, from programs for children to legal counsel for immigrants. At the time of the merger, CAB had a budget of about $6-7 million, and a staff of nearly 200.
The Girls Club was a 40 year old organization originally based in Manhattan. In the 1980s it bought the YMHA building in the Bronx so that it could continue offering services to an economically depressed community. The Girls Club budget was around $1 million and they had 5 youth programs. The staff, including part time employees was about 35.
By 1993, both organizations were facing difficulties. CAB was desperate for space and was in danger of defaulting on several contracts due to a lack of space in which to perform their contracted services.
The Girls Club board felt that their financial situation was deteriorating. The executive director position had been vacant for over a year. Generally, the board felt that it did not seem to be a viable organization, and decided that they had two options: to merge with another nonprofit or close the organization.
The merger between these two organizations took over two years. Three months after negotiations began, and with an interim agreement, CAB moved into the Girls Club building. From that point, they moved in steps. The board was restructured within six months, and the legal paperwork took two years to complete. Both organizations were able to obtain pro bono legal services, and as a settlement house and member of United Neighborhood Houses of New York, CAB received technical assistance from UNH. Legally, Citizens Advice Bureau is the surviving entity.
Why would two organizations merge?
Both parties must want the merger to take place, and obviously, there must be a compelling reason to do so. Being told you must merge is not the right reason to undertake such a venture.
There must logic to a merger -- it can't happen with apples and oranges. For example, a merger between two geographically separate organizations or between organizations whose missions are worlds apart is not likely to succeed.
A merger should be mission and service driven. It should not be about the agency itself surviving, but should be about the survival of services to clients. The services and missions of both organizations will have to be carefully examined to see if there is a connection that will make sense.
In the Citizens Advice Bureau and Girls Club case, their missions were complementary, and it was a matter of economy and program preservation.
A merger is not necessarily a cost saving device for nonprofits, so there may not be a real financial incentive. The major cost reductions that CAB saw was one executive director's salary and some administrative and insurance costs. Obviously, you also don't want to take on a merger where you'll lose: either in relocating geographically or by assuming debt that will be unmanageable.
Both organizations will have to secure good legal representation, However, you don't want the lawyers to work out all the details. A lawyer isn't going to know all of the minutia of your organization, so board members as well as senior staff should be involved.
Weigh the Pros and Cons
Both parties must make full disclosure at the very beginning of negotiations. A due diligence investigation should be conducted by qualified legal representation. This investigation should include everything from recent board meeting minutes to past and future budgets, from insurance policies to pending claims.
In contemplating a merger, you need to understand the other organization's assets, and not just the dollar assets, but also the non-monetary assets like personnel and administration.
McLaughlin noted that both organizations had a number of positive and negative aspects to take into consideration, in addition to concerns that board members voiced.
Girls Club had a well-connected board that was involved in fund raising. Girls Club did not want to lose their mission in the merger.
CAB board was not active in fundraising, and the organization was (some felt) probably over-dependent on government funding.
CAB needed space, but was uncertain whether they could take on the operating costs of the Girls Club building and their debt (their annual budget was $1 million; the building cost around $200,000 to operate). McLaughlin noted that taking on another organization's debt was one of the most frightening aspects about the merger for CAB.
Learn what is important to the other party
A nonprofit merger is not a tactical ploy, and shouldn't feel like a hostile takeover.
You have to discover and understand what the other organization wants, and what's important to them: Is it the preservation of their mission, their name, maintaining their board, their assets, etc.
Sometimes the other party's concerns may seem trivial -- however they can't be ignored. If one organization requests something that the other feels is excessive, it is important for both parties to try to understand why they feel the way they way they do. Disregarding concerns will lead to hard feelings that won't make the process any smoother, and may jeopardize the merger.
Cultural and Ego Issues
Organizations have personalities: management structure, staff, health insurance, pension plans, personnel policies and other operational issues. You can't expect to be able to just plop one mold into the other. There will have to be some reworking of both parties' organizational structures in order to make them cohesive. Structural issues will include how the staff interacts with the board and how information is communicated both in-house and to the public. Personnel issues like vacation and sick time, pension plan, and holidays may be some of the most difficult to resolve. For example, the Girls Club had a severance-pay provision that CAB had to eliminate.
In addition to the formal operational policies, there are also the unwritten, cultural issues of how an organization operates. CAB's staff was workaholic, informal, and consensus-building. Girls Club was more corporate, the staff was more distant from the board.
Although there was some staff resentment, McLaughlin noted that they really didn't have to deal with any serious ego issues because they hired a new staff person to run the Girls Club programs, and didn't fire any employees. Also, Girls Club had no executive director in place at the time of the merger. The Girls Club staff that remained accepted and adjusted to the new culture.
She suggested that some organizations may want to hire an outside consultant to help with all of these processes, especially if there are going to be numerous changes. These changes may be especially hard on the organization being "taken over."
Board Makeup
What is the make-up of the new board going to be? Do relative assets dictate how many board members from each side will be on the new board, or do you allow each organization's existing member a seat, making for a possibly huge board? Will committees be the same or newly constituted?
CAB agreed to offer a seat to each Girls Club board member, however many Girls Club members chose to see the merger through and then resigned. Today the board has 5-6 original Girls Club members and 8-9 original CAB members remaining.
New Organization Name
Do you hyphenate the two organization's names, or create a totally new name? In CAB's case, they really didn't deal with this issue (however, McLaughlin says that this may not be the best way to do it). Legally, the organization name became the Citizens Advice Bureau.
As CAB wanted to continue using the Girls Club name, they included on the bottom of the letterhead that Girls Club is a program of the Citizens Advice Bureau. The Girls Club phones are still answered as the Girls Club of New York.
Funders
Keep your funders informed throughout the entire process. McLaughlin felt that several Girls Club funders pulled back because they probably weren't kept as well informed as they could have been. She also noted that they probably could have raised money for the merger, but missed these possible opportunities.
With regard to government funders, the CAB lawyers took the position that since CAB was assuming all the assets and the liabilities of the Girls Club, this included the government contracts. The agencies (most of them State ones) seemed to agree with this premise.
Summary
Now, two years later McLaughlin said that if they were back at the beginning, they would definitely do it again. The financial situation is much better. All of the debt is paid off, and the Girls Club building is physically improved.
They have added other large programs since the merger was completed, including another shelter. Today the budget is about $10 million, with a staff of over 250 in 15 locations in the Bronx. The only program that was lost was a Department of Education funded employment program that would have folded anyhow.
Approximately 12 Girls Club staff remain (out of about 35 at the beginning of the merger), half still at the Girls Club programs, and the other half now in CAB programs.
McLaughlin is proudest of the fact that after several years work, the Girls Club is becoming an active community center, with high quality youth programs. In hindsight, she felt that they probably could have done better fund raising, and should have connected more with Girls Club supporters, including their board members. She also noted that clients were not involved, including the community board, but in retrospect they probably should have been.
All in all, McLaughlin felt that it was certainly a worthwhile venture because two organizations' missions survived, and most importantly, clients are still being served.
Copyright 1998 Nonprofit Coordinating Committee of New York