The Building Blocks for a Successful Nonprofit Merger

Greetings from the snow covered tundra of Maryland!  Just as we have found ourselves in a deep freeze with snow totals over 40 inches, some nonprofits are finding themselves freezing for lack of membership and funds.  This situation can offer opportunities to nonprofits and associations if they resist the temptation to sit back and do nothing or just conduct business as usual.  Brock R. Landry and Lisa M. Hix, of Venable LLP in Washington, DC, give us a glimpse into what it might take to bring two struggling organizations together to create a single but stronger nonprofit.  No doubt it's not an easy thing to merge two organizations who may have similar goals but very different cultures, however, in today's climate, we must all be ready to explore every option.  Bunnie

The Building Blocks for a Successful Nonprofit Merger
by Brock R. Landry, Esq. and Lisa M. Hix, Esq.
Venable LLP, Washington, DC

Financial imperatives, contractions in membership bases, and consolidation in industries have led to an unprecedented period of growth in interest in nonprofit mergers. As a result, many nonprofits are eyeing current competitors as potential partners. However, mergers can easily fail when organizations mistake a central fact: mergers occur between people, not organizations. Mergers can fall apart for a variety of reasons: unexpected discoveries in the due diligence process, intractable issues that have been ignored, and differences in organizational cultures, among others. The following is a list of "lessons learned" from two association attorneys who have handled a broad range of association mergers.

Establish a Core Group of Merger Stewards. Establishing a group of volunteer and staff leaders to act as stewards of the merger is critical to success. The merger stewards will have two roles: 1) to come to an understanding of the merger plan, and to communicate this plan to the association's stakeholders, including the boards, staff and membership; and 2) to work through the inevitable issues that will arise in the due diligence process and/or as the groups integrate.

Ask the Hard Question Early: Which Organization Survives? Strength of negotiation posture can be measured by financial assets, membership base, industry contacts, and depth of operational expertise. Deciding how, and whether, to acknowledge this power disparity can be key to success in the long run. Early on, the organizations should agree on whether one organization should be viewed as the "surviving" entity, or whether both organizations will combine as equals. Although most mergers are described as the marriage of equals, rarely is this, in fact, the case.

Ask the Harder Question: What Are the Roles of the Respective Staff and Officers? A clear understanding of future roles and authority is central to a successful integration.

Jointly Develop a Merger Plan. The merger stewards from each organization should jointly develop a merger plan. This plan should include an outline of the combined governance structure, mission, core activities, membership categories and dues, and a broad staffing plan. A critical component of this plan is identifying board appointment procedures and the key leaders of the combined organization. The merger plan should include sufficient detail on the hard issues, but should be broad enough to allow for revision and elaboration based on stakeholder input.

Understand Approval Requirements and Dynamics. Once the core elements of the merger plan are in place, each organization should undertake a careful analysis of its respective board and member approval requirements. These requirements will be outlined in the state corporate code provisions of the organization's state of incorporation, as well as each organization's governing documents, such as bylaws. Where high approval requirements exist, early and active communication to the board and members is essential, as is a thorough understanding of permissible voting mechanisms.

Coordinate Internal and External Communication. In organizations with overlapping membership, having a coordinated "sell" document for the staff, board and members of each organization is critical. Release of information should be carefully coordinated between the organizations and each party should agree to give the other notice before making any announcements to the public. Nothing kills a merger faster than being blindsided by an unauthorized communication.

Agree on Coordinated Due Diligence. Merger timelines must allow for thorough due diligence. Associations considering mergers face a multitude of legal, governance, financial, and administrative issues that must be carefully explored and coordinated. To facilitate this process, the parties should agree upon a scope of due diligence and a due diligence timeframe.

Culture Matters. Finally, while it may make good business sense to merge, key stakeholders – including members, staff, and volunteer leaders – will not shift allegiances if the combined organization fails to bridge the cultures of both entities. Mergers work only when associations take the necessary steps to build teamwork and a shared vision of the future.

Brock Landry and Lisa Hix have handled a variety of mergers, including the American Bankers Association/America's Community Bankers merger and the American Electronics Association/Information Technology Association of America merger. For more information, please contact or Mr. Landry at brlandry@venable.com or Ms. Hix at lmhix@venable.com.

This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to specific fact situations.

The ENA Experience

There it was in an email this morning, the announcement of a staff layoff at a national association. There is no doubt that layoff was an incredibly painful experience but the budget demanded it. The Emergency Nurses Association (ENA) has instituted pro-active measures to weather economic setbacks. I really like the "monthly budget performance memos." Rather than waiting for a quarter to go by (or heaven forbid an entire year), the ENA, headed by David Westman, aggressively tracks their financial health on a monthly basis. And has developed a several tiered system for contingency. What is your organization doing? Write and let me know. Bunnie

The ENA Experience

by David A. Westman, CPA, MBA
Executive Director, Emergency Nurses Association and ENA Foundation
Chief Executive Officer, Board of Certification for Emergency Nursing

Compared to many non-profit organizations, the Emergency Nurses Association (ENA) has fared relatively well. We have diversified revenue streams, and several of those streams have continued to perform admirably during the economic downturn – most notably revenue from our train-the-trainer model trauma and pediatric care courses, which are delivered to more than 50,000 nurses each year domestically and internationally. Our membership levels and associated revenue are also (amazingly) still increasing this year. As a result, we haven’t had to take the drastic actions some of our colleague not-for-profits have been forced to into like staff layoffs, salary freezes, etc.

However, we certainly have been negatively impacted by the recession in some key areas. Attendance at our national conferences is down and we have also received diminished support from the corporate world (i.e., sponsorships, conference exhibit sales, publication advertising, mailing list rentals, etc.). This has caused us to tighten our belts in many regards and unleashed creativity in how we approach current corporate sponsors and serve our members.

In terms of cost control, very early in the year we put a freeze on most employee training/development expense and expenses associated with employee celebrations. We also took a hard look at every expense line item and developed our “X, Y, and Z” plans. Each of these plans includes specific expense reductions that may be triggered sequentially after analyzing each month’s financial statements.

The Executive Director and Finance staff, based on this analysis, has developed monthly budget performance memos. This includes recommendations for action that are reviewed by the Board’s Finance Committee. The Committee then makes recommendations to the Board as a whole. Year-to-date, all of their recommendations have been approved.

For example, given results through March, 2009 (we’re on a calendar year) a decision was made to exercise the “X” plan. We’ve now implemented most of our “Y” plan. The good news is that the financial picture seems to be stabilizing, which may mean that the “Z” plan (the most painful of all) will be avoided. Several of the expense line items included in the “X” and “Y” plans may eventually be reinstated towards the end of the year if the revenue picture continues to improve.

In terms of creativity, we’ve taken a number of steps to minimize the negative impacts on employees and our members. Employee training and development continue, with more sessions offered in-house and using low-cost programs. We’ve found creative ways to have fun in terms of employee relationship building and recognition (e.g., brown bag lunches in the office instead of eating out at restaurants).

Relative to our sponsors, we’ve been working with an outside consulting firm to develop lower cost/lower value sponsorship offerings pertaining to both our national conferences and year-round sponsorships. So far, corporate reaction appears to be favorable.

We’re also unleashing additional creativity within the staff organization by creating a new Pipeline Work Team, with the charge of identifying new revenue generation opportunities to supplement or replace the stagnation we have experienced in corporate support.

Overall, our goal from the very start has been to avoid decreasing value perceptions on the part of our 37,000 members. Hopefully they have seen minimal to no impact on such value. Perhaps the closest to a negative impact involves converting hard copy materials (e.g., national conference programs) to electronic formats. However, we’ve been able to position this, truthfully, as an opportunity “Go Green”.

In conclusion, this has certainly been a painful period of time but ENA remains strong. We have taken a number of steps to help us “get by” which will hopefully pay dividends going forward in making us stronger.

Contact David A. Westman at DWestman at ena dot org

How Valuable is Your Finance Staff?

So you got the grant! Congratulations! However, now is not the time to sit back on your laurels. Grant management is as important as getting the grant in the first place, because if you do it well, you may be able to get another grant from the foundation or government agency. Along with making sure the program you promised is on track, you need to make sure your financial management of the grant is on track. Which may mean making sure your financial staff is up to speed on what is required from the grantor or hiring a financial consultant. Dwayne Briscoe of Bookkeeping Results, LLC, provides some interesting advice on financial grant management, some nuggets to think about. Bunnie

How Valuable Is Your Finance Staff?

by Dwayne Briscoe, Bookkeeping Results, LLC

I have assisted in the handling of nonprofit organization finances for years, and recently I’ve worked with organizations as their sole financial “department”. With the experience I’ve accumulated I want to share my thoughts in hope that people may be able to gain some useful insight from an outside perspective.

The new audit requirements for government funded grants; more stringent restrictions by foundations; the new 990 tax filing return; and the detailed scrutiny of donors to determine where their dollars go; are items of interest that need to be discussed and planned for. Grant fund applications are becoming more and more stringent on the financial side, seeking tighter control over accountability and seeking working fiscal year and mid-year budgets. Times are changing and to not be prepared spells disaster for any organization, whether for profit or nonprofit.

There are three key areas to consider for any nonprofit in order to re-evaluate how it is going to move forward and how it is going to sustain its current level of service. The ultimate buy-in must be from upper management, including the board of directors, because it takes a village to sustain a nonprofit, not just one person.

1. Who is managing your finances? I often work with business and nonprofit clients who end up in a situation for which their books are in dire need of clean-up. One reason for this is the hiring of staff or an outside contractor uneducated in how they should perform their duties correctly in order to complete the tasks at hand. Outside of criminal background checks, are personal/professional reference checks made? Testing performed for specific software used for the organization? Or even an expert in the financial field consulted as an outside interviewer?

Not everyone can do accounting work, although some think it’s just simply knowing how to use a calculator. There are too many rules and regulations that can lead to financial ruin.According to Salary.com (http://www.salary.com/) the average low end bookkeeper makes $32,404 per year or $15.58 per hour. The median range is $37,016 per year or $17.80 per hour, and the high range is $41,047 per year or $19.73 per hour. These hourly rates obviously exclude payroll taxes and benefits, but take a look at what you’re paying your staff currently compared to these rates. Another question to consider is that often program staff are given the opportunity for continuing education, but are the financial department staff?

2. Who reviews the grant financial reporting for reimbursements outside of the financial department? If it’s only the financial department doing this, it’s one of the biggest mistakes that can be quite costly in the end. All grants have a variety of rules and regulations that must be followed, including how they are presented for reimbursement. This is where an outside source is a valuable asset to review everything to determine if there are any potential conflicts before the grantor sees it.

3. How often do you review the Agency’s budget and grant budget schedule?

A minimum of once a month is necessary in order to make sure that you are not only on target but can also plan for potential budget changes before the end of the grant term. A budget change less than 3 months out before a grant ends, isn’t always the easiest thing to get approved. Always be aware of where everything is in any given moment, to allow you to be prepared for the worst.Invest in your future by partnering with your financial staff. They are the ones who need your support the most.

Contact Dwayne at http://www.bookkeeping-results.com/

It's Never Good to Play With the Tax-Man

Nonprofits throughout the United States are in audit season, getting ready for their 990 filings in May. This time of year always reminds me of a nonprofit I interviewed with a few years ago.

Being the kind of due diligence gal that I am, before the interview I asked for three years of audited financial statements. Financial statements give you a good snapshot of the organization such as: where the revenue comes from; what programs cost; how much is spent on administration vs. program; are there problem areas or could there be belt tightening; etc. I hope there are no potential executive directors out there that would take a job without looking at the financials. Even if the organization is in financial difficulty, you need to know that so you can intelligently decide whether or not to take the position.

I didn’t get audited statements, instead I got Quickbooks Profit and Loss statements. A part of me thought maybe the board members didn’t understand what I was asking for and I could make it clear during the course of the interview.

The interview itself went swimmingly until we turned to the subject of finance. I again, politely requested three years of audited financials. At that point I was told by the board chair that the organization, that had been in existence for over fifteen years, had never had an audit conducted. I was a bit surprised and I think I said something like “You might want to consider having an audit done.” I mentioned that it didn’t necessarily have to be every year but perhaps at least every two or three years.

I brought up Sarbanes-Oxley, the law that had been passed after the Enron scandal that was supposed to bring transparency to a corporation’s financial operations. A result of that law is that nonprofits now have stricter standards that they have to meet, such as setting up audit committees and getting audits. I was summarily told that they didn’t believe Sarbanes-Oxley required audits, it just suggested audits.

Still curious as to why there was such resistance to having an audit, I said something like “Well what about your funders or potential grantmakers?” I was told that they had never had a problem since their large donors were businesses they dealt with regularly.

Realizing I was getting nowhere, I moved on to a line item that I had questions about. That item was a type of commission they had set up with equipment suppliers, in other words, when those suppliers sold equipment as a direct result of being present at their conference or through advertising in their newsletter, the organization would receive a modest commission on the sale.
The Treasurer then informed me that they preferred not to call them commissions, but rather donations as they didn’t want to have to pay Unrelated Business Income Taxes or UBIT.

I have no clue what expression must have swept across my face, I’m sure it was odd, since I immediately visualized my having to sign a 990 that had false information in it. I stopped asking questions about the financial statement and began wrapping up the interview with “Thank you so much for your time, it was great to meet you,” or something like that.

The next day I called and removed myself from the running. It wasn’t so much that their shady practices made me nervous as it was I sensed a complete unwillingness to clean up their behavior and a resistance to my advice.

Whatever you do nonprofits, don’t play fast and loose with the Internal Revenue Service, it ain’t a good idea. There are consequences that include loss of your exemption, heavy penalties and even jail for the person who signs the 990. In simple parlance, falsifying a tax return is fraud.

While audits can make some nervous, there's nothing like getting a clean management letter. You can proudly take that to funders and members as your report card that you are managing the organization with care and responsibility. I know that smaller organizations often don’t feel they have the money to be audited every year, but certainly should make sure they have the money to be audited every couple of years. It is also highly recommended that you set up an audit committee, even if it’s only three people, just to make sure that money is being accounted for correctly and that the organization’s finances are transparent.

Managing a nonprofit, whether as the chief officer or board member, requires ethical practices and stewardship. After all, people give their money charitably in the belief that their money will be well spent.

Bunnie

contact Bunnie at info@riedelcommunications.com

More With Less

My friend, the CEO of a national nonprofit, was quite stressed. She was facing the prospect of layoffs and cutbacks given reduced membership renewals and a less than stellar annual conference. Dealing with the numbers wasn't really the stresser, it was managing a board that had increased expectations despite the reality of the organization's reduced capacity, that had my friend at her wit's end.

And there was the rub. How do you tell a group of well-meaning people that they might be out of their minds? Or do you tell them?

Now is the time for frank conversation. According to experts the economy isn't poised for a turn-around any time soon. And while we've heard plenty about the retail and housing sectors, the damage being suffered by nonprofits barely rates a peep on the nightly news.

Folks I know say their organization's revenues are down by 30% to 40%. And many nonprofits that rely heavily on conference income report staggering losses in registrations, resulting in the inability to meet room night and meal requirements and incurring the attendant hotel fines. Memberships are slow in coming, sponsorships and trade shows are weak. Yet, especially given the economy, the need for nonprofit services are greater not less.

I think the conversation starts with the Treasurer of the organization. A close relationship with your Treasurer is always a good idea, in lean times or in flush. Often times board members skim through the financial report and if there's money in the bank they are satisfied to move on to other more exciting topics, like legislative policy or who the keynote will be at the Miami gathering. It is the Treasurer who has a vested interest not only in how the organization is faring today but what the numbers will look like six months from now. No one wants to be the "Treasurer" who ran the organization into bankruptcy.

Express your concerns to the Treasurer. Provide projections for the next three, six and twelve months. Clearly lay out the financial obligations of the organization; the lease, the payroll, the equipment rental. Can you sustain the level of service you currently provide? And if not, what has to go? Is it possible to re-tool your services by cutting some and increasing others? Once the Treasurer has a crystal clear understanding of the financial challenges, ask him/her to communicate those challenges to the rest of the board.

And, let it be the Treasurer that tells the board "no." Nonprofit executives who constantly say "no" to the board usually don't last long. But a Treasurer saying "no" carries greater weight and gives the exec cover.

An added bonus is that you as the executive won't have to feel alone, you now have a partner to share the burden. You may not be able to do more with less but you certainly can move the organization toward sustainability in these rough times.

Bunnie can be reached at info@riedelcommunications.com