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What If Your Nonprofit Can’t Weather the Financial Storm?

Wave after wave of financial bad news has hit the nonprofit sector. In 2008, major donors cut back but foundation grants were still coming in, until 2009, when funders cut back. Then in 2010-2011, government contacts went on the chopping block … and they’re still there.

nonprofit governance, nonprofit mergers, nonprofit financial strategies, nonprofit strategic planningThat’s the assessment of Sandra Lamb, CEO of Lamb Advisors, who is busier than ever, guiding nonprofits through mergers and acquisitions. And 2012, with the emphasis on deficit reduction without tax increase can only mean another wave.

Will your nonprofit survive? If you can’t answer that question, shame on you! Every nonprofit board should regularly review the options for maintaining/expanding services and fulfilling its mission. One of those options is merger.

Good governance means considering all the options, even the ones that hurt. Focus on what’s best for the clients, not what’s best for the board or the staff.

Even if your nonprofit isn’t in financial trouble, you should be considering all options for operating more efficiently and sustainably. That may include a strategic alliance with another nonprofit.

Signs that you’re drowning
For those that are financially sinking, Lamb offers a number of warning signs that should trigger serious consideration of a merger; they all boil down to “follow the money:”

  • the reserve fund is tapped regularly for operation costs
  • significant funders are not renewing
  • your gala is no longer society’s baby; it’s not the go-to event any more
  • major government contracts are in jeopardy or not renewed
  • all your financial eggs are in one basket

Two non-financial factors should also be considered:

  • your client base has changed and your organization hasn’t
  • your mission is no longer relevant, e.g. a settlement house whose catchment has gentrified

These, too, may mean it’s time for an exit strategy.

Man the lifeboats
Don’t wait until you’re sinking to find a merger partner. “If you wait too long to consider a merger, there’s no value left to sell,” Lamb says. “Your value can be in geography, people, real estate, or the kind of program you offer. There are lots of ways to create value so the beholder will want to merge with you.”

Looking for a partner before you’re truly desperate will give you more options to choose from and may allow you to phase in the merger through joint fundraising and administration.

Another reason for sooner rather than later: It takes 6 months to a year or more for a merger to be completed. You must have enough liquidity to stay afloat during that time. Add to your normal operating costs the cost of due diligence and legal services as well as outside consultants because your staff may not have the bandwidth to add merger tasks to their daily workload.

Determine what’s worth saving
Boards and executive staff may balk at a merger because they don’t see how bad the situation is or don’t want the organization to go under on their watch. Board members have also invested a lot of time and money in the organization. Merger may feel like failure.

The key to clear-eyed assessment is to focus on the clients. How can services best be maintained or even expanded? “Sit there and think about your clients -- the kids, the disabled, maybe the artists in the cooperative. Think about your mission, not about yourself or your staff,” Lamb says.

That first step -- leadership buy-in -- makes all the difference in whether the merger is a positive step rather than a loss.

The ego issues -- maintaining the name of the organization, who stays on the board, which executive director retains the title -- must be secondary to mission.

Ask for help
Some funders recognize that merger may be the best way to save programs; they offer grants to pay for outside consultants or at least guide the board through the painful decision-making process.

If you can’t find such a funder, set aside money to cover unexpected costs. Stephan Russo, who was executive director of Goddard Riverside Community Center when it merged with St. Matthew’s and St. Timothy’s Neighborhood Center, recommends hiring an outside consultant. “You really need a third party,” he said, listing the reasons:

  • Mergers are time-consuming and staff is usually already stretched.
  • Consultants can be objective, see things staff might not, and suggest solutions.
  • Consultants have experience in the details of mergers -- the legalities, pitfalls, due diligence, etc. that your staff does not know.

Think about it. Can your nonprofit make it through another year or two of government cutbacks? Are things looking even a little shaky? Then be good stewards. Plan ahead. You may find solutions other than a merger but good governance requires checking out all the options.

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