Nonprofits Preparing for Acquisitions: Don’t Fall into These Traps

By Frank Tsai

Acquisitions of similar non-profits to expand market or achieve scale is something that all boards and management teams should consider.  However, successful combinations require a great deal of planning and a disciplined focus on integration.

At FLG Partners, we want to improve the odds that your transaction will be a success. For-profit companies have investment bankers to help guide the process.  Non-profits do not have this resource and often their management teams have never executed an acquisition. Non-profits can learn lessons from both non-profit and for-profit acquisition transactions to help them avoid some common traps.

TRAP #1: Pursuing an acquisition without adequate preparation 

Even successful acquisitions can be a huge distraction from normal operations and impair performance. Poorly executed integrations can cost an organization revenue, margins, staff and donors. More importantly, failed transactions can doom future opportunities.  So, adequate preparation for a non-profit acquisition is critical. 

Make sure all your key systems can handle a steep increase in employees, vendors, facilities, donors, funders, and clients. Efficiencies gained from acquisitions and merging operations can only be realized if your infrastructure and systems can efficiently accommodate the additional volume from expanded operations.

If your systems are manual and/or are not standardized, you are not ready to absorb an acquisition.  Take the time to upgrade your accounting, CRM, HRIS, IT, and payroll systems so that the onboarding of staff, customers, funders, and donors can take place efficiently. You will need to know how to handle accounting for the transition based on your general ledger. Do not do the transaction if you cannot consolidate and integrate your charts of accounts.  Intercompany transactions become a necessary part of accounting for multiple entities or business units.  Make sure your accounting system can handle this efficiently.

Is your IT network and data system properly designed to quickly roll out your environment to the new business unit?  This includes your data warehouse capabilities and security protections. If not, this situation must be addressed before you add additional complexity to your IT operation. Often acquisitions result in porting legacy data that is stored in a different database configuration.  You must have a tested way of porting that data in a secure manner so that your analytics and reporting do not suffer on Day One.

Ignoring preparation requirements for an acquisition invites the potential for massive inefficiencies, management confusion and potential organizational failure if you are unable to consolidate the new business unit’s mission critical systems on Day One post-acquisition.

TRAP #2: Not thinking through your retention and growth strategy for current donors and funders in advance of the acquisition

It is critical that you map out a clear strategy about how you will retain and grow the current donor and funder base of the acquired organization before you execute your transaction. Some acquisitions retain the development staff of their acquired entities, particularly if the acquired organization is in a different geographical service market. For acquisitions in the same market, this may not be as important.  Nevertheless, it is critical to minimize the loss of donors in any nonprofit acquisition and it is critical that a strategy be in place before you move forward so that you can achieve that. By having a growth and retention plan in place, you can communicate the plan early to key staff and avoid losing the team that will be critical for the future success of the combined entity. It can also pave the way for future acquisitions and also reduce anxiety within the acquired team about losing their jobs.

 TRAP #3: Falling in love with the deal or the acquisition target 

Always be ready to walk away from a bad deal. Unlike for-profit acquisitions, with a non-profit acquisition there is no investment banker who can help vet and identify prospective targets and make blind inquiries on your behalf. As a result there is a higher risk that some issues will be discovered during the due diligence process that may be deal killers. The non-profit management team bears the increased burden of properly vetting an opportunity. They must do a deep dive to surface these risks prior to a definitive agreement to merge.

Many transactions do not and should not proceed because important risks to cash flow or contingent liabilities are uncovered and unresolvable during the due diligence process. These risks should be deal killers.  This is why it is so important that the non-profit team that ultimately will be operating the acquired entity must weigh in on the acquisition.  It is critical not to saddle your team with an albatross. Your team needs to own the decision to acquire.  They are the ones that will have to integrate the new entity’s team and achieve targeted performance post-acquisition. They are also best able to identify key requirements that need to be built into the transaction.

Never fall in love with the deal or the acquisition target. And always be ready to walk away from a bad deal.

TRAP #4: Loose lips sink ships

It is critical to keep the acquisition process confidential; acquisitions are a big distraction for both the acquirer and the target.  The target’s staff, clients, and donors can easily be spooked if news of a transaction leaks, thereby scuttling the acquisition.

Confidentiality is absolutely critical to both parties. There are critical management personnel on both sides that will be involved with the due diligence.  It is essential that they are only people that are essential to the process and can keep under wraps. While strong non-disclosure agreements are always important, only involving trusted staff in the acquisition process is a more effective safeguard.

There are organizations in which this level of confidentiality is counter to their culture.  It is extremely important for the acquiring firm to factor this into their decision before an approach is made.

TRAP #5: Taking more than 30-60 days to fully integrate the acquired organization

Ideally the preparation and integration plan and milestones should be developed to meet a 30 to 60-day integration timeframe.  If it takes any longer the risk of brand confusion and loss of key constituencies (donors, funders, board members, employees, etc.) at the organization grows. Your organization should have a communications plan to address key constituencies, perhaps done in partnership with the acquired leadership team, so that continuity with staff, donors, and funders is maintained.

Often it is better to consolidate the acquisition into your nonprofit entity rather than letting the legacy non-profit survive.  You will reduce filing fees, 990 and audit fees, and banking fees.  You may also be able to leave any contingent liabilities in the legacy non-profit.  If this is the case, you will want to make sure there are funds available for the legacy non-profit to purchase insurance “tail coverage” to protect the legacy Officers and Directors.

There should also be a hard cutoff at the transaction’s close.  All employee liabilities, for example, should be closed out at closing, including vacation and sick leave. The acquired entity’s employees ideally should be hired into your organization so if there are staff that you don’t want for whatever reason, terminations should be completed prior to the close. This avoids paying severances, impairment of your various benefits, and employee insurance.  Employees will be onboarded with your new policies and standards and all vendors should be informed about new billing and payment processes.

You will need to decide what to do with the acquired organization’s non-programmatic or overhead staff.  Many may become redundant; however, some may have skills that your current staff lack. You must decide, in advance, who you are keeping and who you will be letting go and incentivize accordingly.  For example, if the acquired organization is to be dissolved you may want to have retention bonuses in place for the acquired entity’s accounting staff until the final 990 form is completed and audits are finalized.  These knowledgeable employees can be critical when dealing with audit firm questions.

If you are a non-profit considering making an acquisition or being acquired into a larger non-profit, FLG Partners can help you assess your readiness to scale.  We can provide independent oversight of the due diligence and can assist with the integration planning. Our years of experience and depth of knowledge about how to maximize the success of acquisitions through careful planning and execution is definitely an asset you should leverage on your organization’s behalf. Contact us at FLG Partners.