As nonprofits merge, a cautionary tale
October 24 2016

K. Sujata, Crain’s

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Just as the economy was emerging from the Great Recession, Illinois was battered by the Great Budget Impasse. Despite the temporary budget agreement, the relentless pressure on nonprofits and on the men, women and children of all ages that we serve, is unlike anything we have seen in our lifetime. The budget reprieve came after human services agencies had already cut services to more than one million people, services unlikely to be restored.

A logical question should be raised. Why don’t more nonprofits shore themselves by merging with others to create larger, more efficient organizations that can serve more clients?

In recent years, the Chicago Foundation for Women (CFW) successfully merged with another nonprofit in the Chicago area called the Eleanor Foundation. Ours were two healthy organizations that saw value in joining together to increase program funding to support economic security for low-income women. As a result, we have been able to significantly expand Eleanor funding from Chicago into the six-county area, and broaden its reach through the support of advocacy efforts.

A catalyst for the timing was the departure of the CEO of the Eleanor Foundation. Throughout the negotiations, both boards were deeply engaged, and we quickly recognized the importance of the Eleanor brand to its leadership and funders. Assuring the Eleanor board that we would maintain the Eleanor name and carry on its legacy was critical to an agreement.

As a funder of hundreds of organizations supporting opportunities for women and girls, we are particularly mindful of encouraging—and funding—restructurings that expand impact. We sponsored a new study that highlights some key factors that contribute to successful mergers: full engagement of staff, CEOs, boards; understanding and respect for each organization’s culture; clarity of goals and purpose; commitment to retaining clients and serving them with dignity; and ongoing support from funders.

We also learned from the study when it’s time to back away. Case in point: 18 months of merger discussions between two venerable, 100-year-old agencies serving children, Larkin Center and Lawrence Hall Youth Services, collapsed when Lawrence Hall discovered deep financial problems, and decided not to take on added risk. Larkin Center closed when no other partner prospects emerged.

This is a cautionary tale. If organizations are under financial duress, merging them is likely to lead to a larger nonprofit in a similar, precarious condition. So while mergers among nonprofits can be an important strategic option for long-term sustainability—a strategy similar to any other business—they should be part of the planning playbook only if three criteria can be met: expanding service area; adding programs; promoting efficiency.

As a solution to fix financial weakness? Absolutely not.

Any healthy restructuring among nonprofits requires the financial support, transparency and guidance of funders—through the merger process and, crucially, beyond. At CFW, our Enterprise Fund provides grants to assist organizations interested in a wide range of opportunities, from acquiring assets to full mergers, such as the 2014 combination of Chicago Legal Advocacy for Incarcerated Mothers and Cabrini Green Legal Aid. When foundations and other funders encourage organizations to explore mergers, they must remain committed afterward. There can be no discount on our obligation to support long-term success when two organizations become one.

As the aftershocks from the budget impasse continue, we will see sharp cutbacks and closings among more nonprofits. If we are to have a prosperous nonprofit sector continuing to serve its clients effectively, it is incumbent on funders, boards of directors, and leadership to continually consider mergers as a strategic option. If it’s a last-ditch option, it’s usually too late.

K. Sujata is the president and CEO of the Chicago Foundation for Women.

Read the original article here.

Review a report on Mergers as a Strategy for Success here.