Co-authored with Felicity Iredale and Portia Pascuzzi.

​

Mergers between not-for-profit (NFP) organizations are increasingly being considered due to current economic and regulatory challenges.

 

This is occurring across the whole sector, from aged care to disability, health to community services, and everything in between.

​

Mergers can present a unique opportunity to bolster service offerings to the community. However, for some, mergers are seen as a way to survive. Either way, it is critical to be “Merger Fit.” You can’t expect to be an agile merger party if your board and organization aren’t ready.

 

This article discusses some of the key pre-merger steps your organization should consider, starting with a strategic merger framework.

​

If you find the right merger party, then the formal merger steps will follow (which this article won’t cover). This typically involves negotiating a terms sheet, undertaking due diligence, signing a merger deed, preparing for merger and then going live to operate on day one as a merged organization.

​

1. Establish a merger framework

Before approaching a possible merger party, your organization should establish a framework to guide its merger activities. It can be a one page strategy, a detailed board paper or even an extensive manual.

​

This framework should take a critical look at your organization’s purpose, values and strategic objectives. It should compile a snapshot of your organization’s current services, clients and geographic offering. This serves as the “base case” to then consider what a merger might look like, for example, in terms of better operational capability, an extended geographic footprint or improved service provision.

​

Establish a Merger Framework

Strategic Drivers: 

What are the NFP’s reasons for considering a merger? Typical drivers include increased or diversified funding streams, increased service offerings, or improving sustainability through scale.

​

Target Evaluation Criteria: 

Describe the criteria for what an appropriate merger party looks like. Consider sector, size, geographic coverage, cultural alignment, service type and financial health.

​

Risk Appetite: 

The board should try to articulate what level of financial, operational or reputational risk it is prepared to accept during the merger.

​

Governance and Decision-Making: State who is in charge of decisions and how final approvals will be made, from executive teams to the board.

​

If your organization’s merger ambitions are well advanced, you could build formal training programs, networks of trusted advisers, merger scenarios, models for merged visions and merger tools.

 

2. Develop your pitch and information memorandum

Finding a merger party can be a bit like speed dating or a shark tank. You need to be able to succinctly communicate what your organization is looking for and what unique value you bring.

​

A well-prepared organization will be better positioned to appeal to a suitable party if it has developed a compelling pitch and information memorandum (IM).

​

The IM is a more comprehensive document that outlines the organization’s operations, governance structure, financial circumstances, service offerings, and essential registrations (like charity status or funding approvals). The IM should exhibit professionalism and clarity, which are important for building trust. It should showcase your organization’s deep understanding of sector drivers and performance indicators. Ideally, it should preemptively answer the questions another merger party will ask (eg home care span of supervision, disability staff billable utilization).

​

If your organization’s merger ambitions are well advanced, then you could start to develop merger terms sheets and indicative offers. These are usually the first formal merger steps. This helps to show your organization’s readiness to merge.

​

3. Establish a search process to find a merger party

Finding a merger party can be a delicate process. Sometimes you will receive unsolicited invitations from those you least expect. Sometimes you will be the one initiating discussions with organizations you already regularly work with.

​

It is a good idea to be systematic about finding merger parties. Some organizations will work on finding introductions through sector networks or referrals. Larger organizations will employ a strategic business manager to undertake this role. Others may formally engage business brokers or estate agents. There are also public sources of information, such as sector lists, which can help.

​

By undertaking these searches systematically, you might identify multiple possible merger parties. However, most organizations do not have the capacity to work on multiple mergers simultaneously. Therefore, there needs to be some planning about who will be formally approached after internal planning. You might start by flagging an interest in mergers in your strategic plan. Beyond that, initial discourse should be grounded in confidentiality, mutual respect and shared purpose.

​

When initial engagement occurs, both parties should be clear on the non-binding nature of discussions while committed to clear and honest communication. Confidentiality is paramount and binding confidentiality deeds should be signed. At this stage, it may be worthwhile to develop a terms sheet or high-level merger plan that outlines the projected structure, timelines and intentions to explore these topics. This is typically a non-binding commitment (except for confidentiality and exclusivity if agreed). You don’t want to invest time and money in due diligence or planning a merged organization if the key terms cannot be agreed.

​

4. Maintain the core business whilst working on sustainability

Possibly the most crucial yet forgotten consideration is that you still need to maintain business continuity while exploring merger opportunities. Merger deliberations can be time-consuming and burdensome for the leadership team and staff. It is akin to asking your CEO to undertake another part time (or even full-time) job. It is important to ensure your organization has management and operational capacity to continue delivering on your organization’s mission.

​

This means:

• Sustaining Service Quality: Clients should continue receiving high-quality services with minimal disruption.

• Keeping Stakeholders Informed: While confidentiality is key, transparency with funders, staff, and clients at suitable stages can ease anxiety and advance support.

• Monitoring Financial Health: Keep a close eye on cash flow, compliance and operational performance. A depleted financial position during merger deliberations (or a short time before running out of cash) can weaken negotiating power or completely derail the deal.

 

If your organization is in some difficulty, it needs to simultaneously continue to work on its financial sustainability. You can’t bank on pulling off a merger – a generous potential merger party might offer a temporary lifeline but it could walk away at anytime. So, your organization may still need to work on things like improvingutilization, making difficult decisions to close unsustainable business divisions, or putting lazy assets towards more productive use. Some of these things will be what a merger party will look to do. The fact that your organization is already working on such projects will put you in good stead.

​

Conclusion

Mergers offer NFPs an opportunity to scale impact, improve sustainability and better serve their communities. However, a successful merger starts well before finding a merger party or formal negotiations. It requires the board, management, stakeholders and members to be mentally prepared and convinced of the benefits of merging.

​

By developing a clear merger framework, working on a pitch and information memorandum, whilst staying focused on business as usual and working on sustainability, this will help your organization get “Merger Fit” for your NFP merger journey.

​

​