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28 HARTFORDBUSINESS.COM | JULY 10, 2023 FOCUS: NONPROFITS Nonprofits: Don't fear the merger By Brian Kelleher and Amber Tucker M ergers among nonprofits are less common than in the corporate world, but they can have many advantages. Done properly, a merger can preserve the elements of an organiza- tion that are working well, while cutting costs by eliminating redundancies. How are nonprofit mergers different? Private companies typically welcome acquisition as a sign of successful growth, but nonprofits have not traditionally held that view. Nonprofits tend to seek mergers only when they've exhausted all other options. Still, considering the potential advantages, it's a mistake to see a merger as a last resort. Another difference is that a nonprofit merger doesn't involve buying interest in a company. The merger process instead relies on the board of directors at both organiza- tions reaching an agreement. Striking that agreement can be difficult, even if financially it's the right thing to do. Merging with a larger organization may mean that only a few of the smaller entity's board members will carry over to the new organization, so they won't have as much representation on the board. Even those board members who stay on may be hesitant to relinquish control over their organization's mission and management, especially if they have had an active governance role. Advantages of merging Nonprofit mergers can represent a huge cost savings. Think about how much you are spending on the admin- istration side of your organization. If a community has two nonprofits that are doing very similar things, they could both benefit by combining forces — maintaining their programs but spending less on office costs and other expenses that can be shared rather than duplicated. In addition, it may be beneficial for the individuals obtaining services from these merging nonprofits. For example, if a behavioral health and a drug and alcohol recovery facility merged, a consumer could receive both services from one location. Reducing the amount of money that goes into administration means you can channel more of your dollars into the mission. That's a clear win. Tips for a smooth merger Being proactive when considering a merger, rather than waiting until you have no choice, gives your organization more time to plan. Because board member commit- ment is such a key part of nonprofit mergers, success requires spending a lot of time talking things through before starting the process. Timing matters, too — for example, the retirement of an executive director may be a good time to consider merging. What exactly will the merger look like? How similar are the missions and cultures? Is there clarity and agreement about which parts of each organization will be kept? Are any board members or executives likely to have concerns or objections? It's best to avoid last-minute surprises. Make sure your accounting and legal ducks are in a row — not only the accounting of the actual transaction, but also the financial health of each entity involved — before you start the merging process. This is easier than it used to be, because most nonprofits have modernized their record-keeping systems in recent years. If you're the acquiring organiza- tion, make sure you evaluate each program before bringing in one that has historically generated losses — a nonprofit that is failing because it's not getting enough funding to run the program — unless you have a specific plan to change that. Simply merging won't suddenly make a failing program able to sustain itself, even if you're saving on administrative costs. On the other hand, a strong nonprofit can sometimes rescue a smaller one that's losing money but provides a necessary service to the community. The point is not to go into such a merger blindly. It's also important to consider how you're communicating the merger to stakeholders. The community may have concerns about how this change will affect the services it relies on. If a local organization merges with a larger nonprofit that serves a broader area, donors may worry that the new entity won't have the same local feel. They may be less willing to give if they don't have the sense that the new organization serves their immediate community. The way you describe the merger with donors and the wider community will have an impact. While we may think of private companies when we hear the term "merger," there are many reasons nonprofits may pursue this route. Keeping an open mind about mergers — and following best prac- tices — can lead to a successful future for many nonprofit organizations. CPAs Brian Kelleher and Amber Tucker are partners at accounting and advisory firm Fiondella, Milone & LaSaracina LLP (FML CPAs). Disability services nonprofit Oak Hill operates Camp Hemlocks in Hebron, which provides outdoor experiences for 200 to 300 people. PHOTO | CONTRIBUTED budget hearing testimony from 170 witnesses, and a rally that brought about 1,200 nonprofit leaders and advocates to the Capitol. The alliance stressed that the nonprofit sector employs 115,000 people — 7% of Connecticut's work- force. Nonprofits pay almost $4 billion in wages and another half-billion in spending for goods and services. In addition to increased funding, the industry lobbied for a host of structural changes, including imple- mentation of study recommendations that suggest having nonprofits take over state-run group homes would save taxpayers millions of dollars. Casa and Simon agree legislators have the facts in front of them but failed to pull the trigger on authorizing more funds amid all the competing interests at the state Capitol for limited resources. Simon reiterated his offer to host any of the decision makers willing to come and work a full shift in one of Oak Hill's group homes. "They need to see the complexities of the job and the dedication of our staff," Simon said. So far, there have been no takers. Dollars in short supply Still, short term, the problems are not being felt uniformly across the nonprofit sector. Corrianne Chipello, execu- tive director and CEO of Camp Courant, reports the program opened June 26 with a full staff and full roster of 750 campers. But that doesn't mean it was easy, she said. The competition for the scarce supply of lifeguards was particularly stiff. Her fear is that nonprofits like Camp Courant will slip off the public's radar because they've been deliv- ering for 129 years. "Every dollar impacts the kids," she said. Eric Harrison, president and CEO of United Way of Central and Northeast Connecticut, hears concerns from a broad spectrum of nonprofits across the 52 townships under his purview. He echoes Curtiss' sense that admin- istrative expenses are in the bull's-eye as nonprofits struggle to wring more mileage out of their budgets. There is a broad sense that technology — particularly artificial intelligence — could bring some savings, as could remote work. And, a wave of consolidations may be right around the corner. He also echoes Dowd's warning that a crisis is looming, and urges the state to take a fresh look at a child tax credit. But, as hard as nonprofits work to save pennies, the big dollar fix remains in changing the way the state thinks about nonprofits, industry advocates said. And that's a fight the industry is readying for the next budget cycle in 2025. EXPERT'S CORNER Amber Tucker Brian Kelleher