Understanding Nonprofit Mergers

Sometimes I work with nonprofits that are considering merging with one (or more!) other nonprofit groups. Mergers can be a happy thing, but they can also come out of one organization being stressed to the point of needing support. Sometimes it's necessary and very emotional.

Regardless of the reason, deciding to merge nonprofits is a big decision – making the decision to merge is just one task in a long process. My goal is to help you understand (and be less intimidated by) the process and to prepare for making the decision to merge.

What is a Merger?

A merger is not one nonprofit going out of business – that’s a dissolution. A merger is the combination of two or more organizations. Just as when two people get married, their assets are combined, and they have joint ownership of assets and joint responsibility for debts of each spouse. Merging is serious, and it’s not always the best path forward. Sometimes we should consider different options instead of a real merger.

What other options? Often, I speak with clients who are talking about “merger,” but it turns their goals are different. Sometimes, the real goal is to salvage just one program from a nonprofit that needs to close. For voting member organizations, the goal may be to give the members a new home after a struggling organization dissolves. Other times, the nonprofits have very similar missions and would just benefit from combining forces to eliminate redundancy and make the most of their dollars as one organization.

Often a merger is sparked by financial distress, and it’s important for both organizations to understand what they need and what they are taking on in a true merger.

How Do Nonprofits Merge?

A merger is a multi-step process defined by state law. So, the first thing to know is that – this process varies depending on what state you’re in. And the second thing to know, it’s not a quick and easy filing. Mergers take time.

Even for a small to mid-sized organization with uncomplicated assets, the process can take between 6 and 12 months to complete. Larger organizations with more restricted assets and more real property and equipment or government funding the process can be longer or at least more complicated.

In my home state of Minnesota, here are the legal steps for a merger – this is after the orgs involved have done their due diligence.

1. Boards Agree to Plan of Merger
2. Boards Resolve to Merge
3. Voting Members (if any) Vote to Merge
4. Notify MN Attorney General
5. Wait for Notice Period to End
6. File Articles of Merger with MN Secretary of State
7. Notify MN Attorney General with Certified Articles of Merger
8. Post-Merger Work

While “Post-Merger Work” sounds quick, this could be a very long process including steps like:

• Close Tax ID accounts with the IRS
• File any final 990 filings for the defunct tax ID numbers
• Reconcile the ledgers of all merged organizations
• Update bank accounts, investment accounts, etc.
• Notify landlords, re-sign leases, or file an affidavit of identity for owned real estate
• Notify grant funders
• Transfer or file for assumed names (aka DBAs)
• Develop PR strategy to notify donors & your community

But Should You Merge??

As you can see, this is a complex and drawn-out project to take on. Many times, clients come in without understanding the consequences of a true merger. If you’re considering a merger, it’s crucial that you do your due diligence before you decide to move forward.

Depending on what you find in your due diligence phase, you may decide that a true merger isn’t the best way forward. There are other options that don’t include merger. If one organization has a lot of entanglements its future merger partner doesn’t want, then we can consider another option like:

• Transferring assets and dissolving the more troubled organization.
• Offering the organization’s members a new home with another nonprofit and dissolving the organization.
• Dissolving both nonprofits and forming a new nonprofit which will receive any assets left over in the dissolutions.

Mergers are a complex process during a time that is often very stressful and emotional. While it's possible for an organization to go through it alone, it's much easier to have an experienced lawyer help you through it. The lawyer can carry some of the burden and act as project manager for the process.

Jess Birken is the owner of Birken Law Office, a firm designed to help nonprofits. Ideal Client Engagements are nonprofits looking for a strategic partner who will give pragmatic advice and keep business operations on track so the mission work stays a priority.

©Copyright - All Rights Reserved

DO NOT REPRODUCE WITHOUT WRITTEN PERMISSION BY AUTHOR.