Experts Explain How to Map Successful Nonprofit Mergers

New York, NY (PressExposure) August 11, 2009 -- From: Jeffrey Sussman, Inc. Marketing Public Relations 249 East 48 Street New York, NY 10017 FOR IMMEDIATE RELEASE

For: Obermayer Rebmann Maxwell & Hippel

Contact: Jeffrey Sussman 212-421-4475 []

Two of the country’s foremost authorities on non-profit organizations, attorney Penina Lieber and non-profit executive Susan Chase, have been advising their clients on how to engineer successful mergers, which have proven necessary as a result of the severe economic downturn. For a sector that has traditionally focused on a mission of service and caring, the harsh reality of inadequate funding and escalating costs has been sobering. To put it bluntly, nonprofits are simply out of money!

As foundations cut back on grants and the private-funding tap emits only a trickle of money, non-profits are facing an ongoing and increasing pressure to merge. If mergers were not to occur, then nonprofits would not be able to meet their stated community goals and would have limited capacity to comply with best practices in governance and management.

“When a potential merger looms on the horizon, various processes come into play. In fact, it appears that there may be as many approaches to finding a partner as there are nonprofits in trouble,” notes Ms. Lieber.

“A merger may become a viable option when an organization experiences a financial meltdown or similar crisis,” says Ms. Chase. “In such cases, leadership may desert the sinking ship, leaving behind a few disheartened survivors with little, if any, resources to bail out the nonprofit. Money often becomes the key driver during that struggle. Major foundation funders may then recommend merger as a means of organizational survival. To facilitate change, funders may identify a likely partner and even financially support the merger.”

“An alternate process may be utilized in other instances where pre-crisis strategic planning has identified merger as the best option for the organization’s long term sustainability,” says Ms. Lieber. “Under that model, the Board of Directors considers the problems facing the organization and reaches consensus that merger is indeed the best option. Depending on the size of the Board, either the full Board or a specially constituted committee may consult with major funders. A request may be submitted to them to fund outside counsel at an early stage to help guide the process.”

Under this model, outside counsel, such as Ms. Lieber, takes on a pro-active role, supporting Board and senior staff in identifying criteria necessary for finding a preferred partner. These criteria grow from within the organization’s values, programs and resources. This process enables outside counsel to pose the tough questions when advising the organization regarding the prospective merger: Ms. Lieber and Ms. Chase put together the following essential questions:

1. Will there be a future role for current Board members on the prospective merger partner’s Board? 2. Will the merger ensure the organization’s continuing commitment to serving special populations or continuing specific programs post-merger? 3. How will the merger protect and preserve the future use of Board designated financial reserves? 4. Will staff benefits (such as accrued PTO, years of services, etc.) be transferred as part of the merger transaction? 5. What are the organization’s assets, intangible and tangible, that may attract a merger partner? 6. Is there an action plan and timeline for completing the merger transaction?

Once these critical issues are isolated, outside counsel may guide the Board and senior staff into prioritizing issues classified as “non-negotiable”, “somewhat negotiable” or “totally negotiable”.

As a next step, the Board may develop a “Request for Proposals” (RFP) that provides background information about the organization and its reasons for seeking merger. The RFP may also describe the organization’s assets and strengths (especially intangibles) that may be important to a prospective merger partner. In some instances, it may be the organization’s reputation for program content and delivery; at other times, it may be a financial nest egg in the form of an endowment or other segregated funds. In still other cases, it may be access to governmental licenses or historic funders. Once the RFP is completed, the proposal is generally circulated to a broad segment of the service sector. Advice may be sought from key community stakeholders who may have recommendations regarding appropriate partners.

As the process continues, preliminary meetings, site visits or “interviews” may be held with representatives of the Board/merger committee, senior staff and interested merger partners. When a small pool of “best potential partners” is actually identified, outside counsel can begin its due diligence review. This legal duty of care has taken on a critical dimension today in light of recent financial scandals and Ponzi schemes, in which victimized charities lost immense amounts of money without even blinking an eye. Given inadequate internal controls and frequent mismanagement of assets, the need for proper due diligence goes to the heart of any prospective merger. When properly relied upon, existing fiduciary duties can impose accountability on what may otherwise be daunting circumstances and faulty information. The due diligence process, with its correlative duties of inquiry, review and evaluation, provide nonprofit merger partners with the essential tools by which they can satisfy their legal responsibilities of care.

Ms. Lieber, at such a point, will assist the organization in analyzing a partner’s financial statements, organizational documents, business plans, program statistics, restricted assets and licenses/contracts so that the Board is prepared to make educated and informed decisions. The due diligence process does more than protect the decision-maker. It also provides a valuable opportunity to step back, take time-out to assess the overall merits of the change and to evaluate its impact on the future course of the organization, its constituency and its mission.

Restructuring does not happen overnight. It is generally the product of a lengthy process of critical self-evaluation and appreciation of the available options to consider. Due diligence poses lots of questions: Who is this partner? What hidden or contingent liabilities may exist? How will this transaction affect the organization’s donor base – its benefactors? Its membership? Its employees? Its clients? Are there unforeseen assumed risks? In short, what is the “fit” with this new partner? It is essential for any organization contemplating merger to appreciate the need to scrutinize an organization’s endowments and restricted funds. Where restricted funds exist, as they do in many older service organizations that have been blessed over the years with substantial donors, the organization may be constrained from changing course without review by the State Attorney General and even obtaining court approval, which is why an attorney specializing in non-profit tax law, such as Ms. Lieber, can offer essential guidance. Some of the most important due diligence questions are:

• Are there any tax liabilities under state or federal law? • Have withholding taxes been paid? • Are there pending real estate tax issues? Does the organization have a local real estate tax exemption? • Are there potential environmental problems - Underground storage tanks? Asbestos? Or sold waste? • What employee benefits exist? To what extent will they be assumed in the transaction? Is there a requirement for comparability? • Have COBRA requirements been considered? • How many people are employed currently by each organization? Have any representations of continued employment been made? How many employees are expected to continue post-merger? • Do any employees have contracts? • Are all licenses and permits in good standing? Can they be assigned? • Will local bodies reissue licenses and permits post-merger? • What is the status of the accounts receivable? Are they collectible? • What is the physical condition of the premises? Is the facility in good repair? Will it need significant and immediate repairs? • Does the organization have adequate insurance coverage? Is it up to date and does it have tail (extended) coverage? • Have appropriate provisions for termination of the merger process been considered in the event that the transaction unwinds? • Have all corporate documents been carefully reviewed for consistency, timeliness and compliance with current law?

“This process is not to be taken lightly because today’s professional managers and Boards must steer the organization with a steady hand,” notes Ms. Lieber.

Once the due diligence process is completed, the time is ripe for internal deliberation and discussion. When the Board reaches its conclusions about the viability of the proposed merger, it is in position to take formal action to approve the transaction. Both the Boards of the acquiring organization and the acquired must approve the proposed Plan of Merger, the single legal document that sets forth the key term of the transaction. The Plan of Merger is effective by operation of law, i.e. once filed or at a specific date, the terms become operative and enforceable. The Plan should, of course, contain a provision by which the transaction may be aborted should there be a failure to reach agreement by one or both parties. Private celebrations may follow, whereby Board and staff members have an opportunity to get to know each other and acknowledge the fundamental change. Finally, the transaction may be completed with a public roll out and announcement.

Ms. Lieber was asked if all mergers are successful, achieving their stated objectives and goals? She replied that “an honest appraisal would have to admit that ‘it all depends.’ Sometimes the fit is good. The transition proceeds seamlessly and the mission continues in a different guise. At other times, the road may be somewhat rocky – in terms of personalities, finances, programs, public perception. If the merger has resulted from structural deficits within one partner, those deficits may be cured by a new organizational system. If the merger, on the other hand, has resulted from financial hardship, the problem may be alleviated by an influx of ready operating cash. Yet for many merged organizations, success may be a mixed bag. If done in a hurry and without careful consideration, the result may be a one-sided loss of autonomy without a correlative trade-off in capacity, market development or financial relief. Where that happens, the mission may be ultimately sacrificed for a larger agenda. Where proper due diligence has been performed and the merger has not been hurried, the success rate is higher. Where the process has allowed each organization to adjust to the changing circumstances with adequate information and opportunity to ‘buy-into’ the concept, the chances for a successful transition are markedly positive.”

“With that in mind, organizations on the brink of merger should not be scared away”, notes Ms. Chase.

“Merger is one of several statutory options available under nonprofit corporation law,” says Ms. Lieber. “In today’s depressed economy, merger may well become a favored approach to bringing together two similar entities, preserving those qualities that are viable and eliminating those that constitute unnecessary duplication. The law is flexible in setting standards for merger; nonprofit organizations should not be deterred from considering merger because they fear the process. It may well be a worthwhile opportunity for them to engage in a critical self-study that will equip them for future growth.”

Penina Kessler Lieber ( is an attorney specializing in non-profit law and tax issues with the Philadelphia-based, regional law firm of Obermayer Rebmann Maxwell & Hippel LLP. She represents nonprofit and tax-exempt organizations, exclusively. The firm’s website is

Susan Chase is a consultant on nonprofit matters. She was formerly Executive Director of Working Order, a Pennsylvania nonprofit organization that successfully merged with Volunteers of America.

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Jeffrey Sussman, Inc.

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Press Release Submitted On: August 11, 2009 at 3:21 pm
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