Preparing for a Merger or Affiliation: A Guide for Board Members by Adam Cole, Partner, BDO USA, LLP
When considering a merger or affiliation, board members and key executives of nonprofit organizations are increasingly asking the question: “where do I begin?” In the wake of proposed funding reductions, nonprofit organizations are looking for ways to reduce costs, without reducing quality or jeopardizing the infrastructure. One popular choice these days is an affiliation or merger with another nonprofit that can help to strengthen an organization’s ability to serve those within their mission.
Nonprofit mergers can take on several different looks. There is the full take-over of another organization, which results in one organization ceasing to exist. The successor organization assumes all debts and potential unknown liabilities. Types of potential unknown liabilities that could be a potential risk to the successor organization include litigation, third-party reimbursement overpayments and asset remediation costs, such as environmental problems at a site.
An alternative to the full takeover is the affiliation. This has been the preferred avenue for many of our healthcare related clients. The affiliation is achieved through a change in the composition of the board of the organization being taken over so that there is a majority of board members from the successor organization and control is achieved.
As a board member of a nonprofit organization the decision (internally) to merge or affiliate lies solely with you and your fellow board members. The following sample of key considerations will assist board members to ensure the proper steps are taken by their organization to effectuate a successful merger or affiliation:
- Identify whether or not you need a merger or an affiliation to survive.
- Make sure both organizations have common ground on their missions.
- Understand the financial models and the burn rate of cash, both pre-merger/affiliation and post-merger/affiliation.
- Understand the comparison of compensation, benefits and union affiliations, if any, on the overall cost structure on the combined organization.
- Determine if you will gain leverage with existing and future funding sources to negotiate reimbursement rates.
- Determine impact of any transaction on the debt covenants of both entities.
- Evaluate the timeliness of the final reports each month and annually.
- Determine if there are any conflicts between existing board members that may derail the transaction.
- Determine the composition of the surviving board in a merger.
- Determine if you are willing to relinquish control to another board of directors in an affiliation agreement with single sole member structure or majority board structure.
Proper planning and preparation can help your organization determine if this is what you want. I recommend not waiting until it’s too late.
For additional resources designed to assist nonprofit boards, please visit BDO’s Nonprofit Standard at: http://nonprofitblog.bdo.com/index.php/resources/