During the economic downturn that began around 2008 and continued for several years, mergers and acquisitions between for-profit businesses slowed significantly. However, mergers, consolidations, and other types of affiliations began to proliferate among nonprofits during this time as several factors forced nonprofits to look for means to cut costs and do more with limited resources. […]
During the economic downturn that began around 2008 and continued for several years, mergers and acquisitions between for-profit businesses slowed significantly. However, mergers, consolidations, and other types of affiliations began to proliferate among nonprofits during this time as several factors forced nonprofits to look for means to cut costs and do more with limited resources.
The recession affected nonprofits especially hard as they saw a decrease in individual giving, reduced endowments, and an increased demand for services along with other higher expenses. Generally, individual giving accounts for 75 percent to 80 percent of charitable contributions to nonprofits, with gifts from private foundations, bequests, and corporate giving accounting for the remainder of charitable contributions.
It is estimated that cash contributions to nonprofits peaked at $156 billion in 2006 but fell by 13 percent from 2007 to 2009, and that non-cash contributions peaked at $62 billion in 2007 but fell by 47 percent from 2007 to 2009. Private giving in 2010 returned to pre-recession levels, but the steep decline in giving during the recession years placed severe financial pressure on nonprofits.
Adding to the strain caused by the drop in charitable giving during the recession was the decrease in endowment value suffered by the majority of nonprofits. Not only did many organizations witness a decrease in endowment value due to the collapse in investment asset values, but the decrease in charitable contributions also forced a significant number of nonprofits to draw down reserves or endowment money just to maintain operations.
Mergers, consolidations, and other types of affiliations allow nonprofits to stretch limited resources by creating efficiencies through economies of scale and reducing overlapping services. These types of transactions typically only occur among nonprofits that perform similar services and are formed for similar charitable, educational, or religious purposes. Further, nonprofits in New York are generally formed under the New York Not-for-Profit Corporation Law and must navigate that law’s restrictions, including obtaining approval of the state Office of the Attorney General, the courts, and various New York state agencies, before a merger or consolidation can be completed. However, despite the legal restrictions that must be overcome to complete a merger, consolidation, or other type of affiliation between nonprofits, the benefits provided by these types of transactions allow cash-strapped nonprofits to continue providing important and needed services.
An additional benefit created through nonprofit mergers or consolidations is found in the decreased competition for limited resources, such as state funding. An example of this can be found where two organizations provide the same charitable services, such as assistance to persons with specific needs, but in different locations that are in close proximity. These types of entities provide services to their communities that are typically eligible for limited amounts of state funding through contracts or grants. The merger of these two nonprofits would not only allows these entities to reduce costs by consolidating staff, reducing office space, and thereby reducing administrative costs and overhead that deplete valuable resources that could be used to fulfill the organizations’ charitable purposes. On top of that, it also means that the organizations are no longer competing for limited resources like state funding or charitable contributions. In short, a merger or consolidation will allow nonprofits in most cases to both decrease costs and increase potential sources of support for their charitable purposes.
Completing a merger or consolidation will require nonprofit administrators or directors to consider how best to combine the assets and personnel of the two entities’ operations in a manner that will best promote the organizations’ charitable purposes and the services they provide. Administrators must make important determinations regarding reducing office space, how best to consolidate administrative staff, such as accounting or payroll personnel, to reduce redundancy, and where to locate the new organization’s primary office. Due to the requirements of New York’s laws governing nonprofits, a merger, consolidation, or other affiliation can be a lengthy process. But proper administrative planning will allow the newly merged or consolidated organization to generate significant savings and provide the potential for better services as the pool of staff and expertise available to the organization is expanded.
Scott R. Leuenberger is a business law attorney at Bond, Schoeneck & King, PLLC. He has experience in for-profit and not-for profit corporate formation, Internet startups, and corporate financing. Contact him at sleuenberger@bsk.com or (315) 218-8393.