Mergers Keep Doors Open, Refocuses Management
September 4, 2012 Mark Hrywna
Chuck Gehring has overseen four nonprofit mergers in his years as president and CEO of LifeCare Alliance in Columbus, Ohio. “It’s important in this economy, in our field, if you don’t try to do something extra, you’re going to be out of business,” he said. “Your traditional revenue sources – United Way, government — are eroding. If you’re going to just keep laying off you’re not able to do anything.”
Gehring credits his private sector experience — he joined LifeCare Alliance after 10 years in operations and finance at brewer Anheuser-Busch — for the way he thinks about mergers and partnerships. “I learned back then, when a job came open, even if you’re having the best year ever, you still analyze it for the future,” he said. “The difference to me is, if we discontinued a product, there weren’t many people who cared because no one was buying it. Here, if you discontinue a service, somebody doesn’t get help.”
It’s unclear precisely how many charities have closed as a direct result of the recession or whether they’ve merged with other nonprofits. At the very least, industry analysts say, there’s much more discussion about mergers and strategic alliances or partnerships these days.
Margaret Linnane, executive director of the Rollins College Philanthropy & Nonprofit Leadership Center in Winter Haven, Fla., said there have been a lot of layoffs at charities but she hasn’t seen as many mergers or closings in the Florida region as she expected. Some smaller charities faded away, particularly those that were heavily dependent on government funding.
In Florida, three blood banks completed a merger early this year, creating the largest blood bank in the state’s history. National organizations seem to be doing a lot of restructuring, creating more efficient chapters rather than community-based ones, said Linnane.
The American Red Cross (ARC) began consolidating affiliates around the nation but that was in response to a $200-million operating deficit, before the depths of the recession struck. The ARC today has 550 chapters connected to 1,200 offices, compared with approximately 700 chapters four years ago. “Much of our effort has been focused on consolidating support services and back-office functions…where we found a great deal of duplication in our chapters,” said spokesman Roger Lowe. He added that the number of Red Cross offices is roughly equal to the number of chapters a decade ago.
United Way affiliates have merged in recent years to increase efficiency. For smaller affiliates, mergers sometimes took place to maintain a presence in a particular service area, according to United Way Worldwide spokesman Bill Meierling. There were about 60 affiliates in 2008, but now there are roughly 30. Four more mergers of United Way affiliates went into effect this summer, including seven affiliates in the Philadelphia and southern New Jersey area, Michigan, Florida and Wisconsin.
Anecdotally, several observers of the nonprofit sector said that they hear at least more discussions about mergers or strategic alliances if not full-on mergers.
“We are perhaps on the brink of an era of mergers acquisitions but we’re not there yet,” said Bob Ottenhoff, out-going president and CEO of GuideStar in Washington, D.C. “Government funding is still kind of a mess. Depending on where you are, it’s still really, really bad if you’re in states that are having trouble,” he said, adding that the sector is a lot worse off than it was five years ago.
There’s still a good bit of economic uncertainty in the future, as Ottenhoff points to GuideStar surveys of nonprofits that continue to see about 1 in 12 respondents saying they’re in danger of closing for financial reasons. “The economics suggest we’re on the verge of something,” he said. There is more talk and heightened awareness, he said, so perhaps it will take some time.
While some charities might file for bankruptcy, some simply close up shop and don’t bother filing any paperwork with the Internal Revenue Service (IRS). And when it comes to mergers, there isn’t any documentation to file with the IRS, other than perhaps a new Form 990, as opposed to the two (or more) that organizations would have had in their previous incarnations.
The IRS did report a 16-percent decline in tax-exempt organizations in 2011 — a loss of 331,000 from 2010 — but about 385,000 in all were related to revocations by the IRS for not having filed tax forms for three consecutive years. How many of those were already defunct and how many closed because of the recession or merged is unclear. Except for 2011, the number of tax-exempt organizations typically rises each year, anywhere from 1 percent (2006) to almost 3.7 percent (2008).
The number of applications for tax-exempt status has been dropping during the past five years, from more than 90,000 in 2006 to 61,000 last year. The percentage gaining approval by the IRS was up sharply last year. After several years of 80 to 83 percent getting approval, almost 90 percent were approved in 2011.
In his more than 22 years as a consultant, much of that time doing mergers, Thomas A. McLaughlin said now is the single most intense time in mergers and alliances among charities. The economy is certainly part of that, “catalyzing some of what would drive collaboration of all kinds,” said McLaughlin, founder of Andover, Mass.-based McLaughlin and Associates.
The obvious question to McLaughlin is: After the recession and stock market crash of 2007 and 2008, it’s 2012 — where are the mergers? It’s a difficult question to answer, since no one has to report a merger in the way a public company must file documents with the Securities and Exchange Commission (SEC), said McLaughlin, author of Nonprofit Mergers and Alliances. Typically, the nonprofit sector lags the economy as a whole — good or bad — for roughly two years, he said. That would mean charities likely were affected by the 2008 stock market crash in 2010.
Nonprofits, particularly those relying on government funding, have seen declining or flat revenues while service demands continue to increase, said Ottenhoff. “I don’t think we’re seeing as significant a reduction yet, but we’re seeing budgets plateau and resources significantly tighten up,” he said.
“We’re on the verge of something happening, if the economy doesn’t pick up. We’re going to begin to see those discussions and mergers and acquisitions become more prevalent. But it’s on people’s minds like it wasn’t five or 10 years ago. The golden age of funding and those days are over,” said Ottenhoff.
Columbus (Ohio) Goodwill swallowed up United Cerebral Palsy of Central Ohio (UCP) last year. Mary Vail, vice president of mission services at Columbus Goodwill, also has seen an uptick in organizations approaching Goodwill about a merger or some type of partnership.
Columbus Goodwill was approached by the United Cerebral Palsy (UCP) affiliate almost two years before last year’s merger took effect, at a time when managers noticed revenues and resources eroding, particularly around United Way funding. “They weren’t necessarily having financial challenges at that time, however, projecting into the future they feared facing a significant financial challenge,” she said.
MELDING BOARDS, STAFF
The $37-million Columbus Goodwill operation eventually brought on about eight of the 24 employees at the $3-million UCP, hiring all direct care staff, as well as filling some vacancies. Those not hired were mainly in back-office operations, said Vail. Also as part of the agreement, one board member from UCP’s 15-member board would fill a vacancy on Goodwill’s 26-member board.
“The biggest challenge was working with staff at UCP in terms of, people who knew they would lose their jobs but still engaged in doing their work on the merger,” said Vail.
Columbus Goodwill had evaluated other merger opportunities but didn’t move forward because the board, executive director or staff members did not agree with the decision to merge, said Vail. “It results in lot of complications. That’s the biggest priority, making sure those things are aligned. It has to be win-win for both organizations,” she said.
It’s hard to do a merger for a nonprofit, particularly with ones that are in failing financial shape, said Ottenhoff, because merging two organizations doesn’t necessarily result in more revenue. In some cases funders cut back funding after a merger, he said.
LifeCare Alliance’s mergers tend to add similar services rather than eliminate duplicative services. IMPACT Safety is a training organization centered on domestic violence and safety issues. Gehring said they were interested in IMPACT Safety because the services complemented LifeCare’s services to seniors, including Meals-On-Wheels and visiting nurses. Gehring described the latest merger with IMPACT Safety as simply a good match. “They didn’t need to merge, but financially, it wasn’t a bad thing,” he said.
The merging organization’s board is now advisory in nature to LifeCare Alliance’s board, and members are encouraged to serve on their committees. Gehring looks at these groups’ board members as a feeder system of sorts. “Why would we want to lose those people,” he asked rhetorically.
Often the best assets of nonprofits are the people who’ve been running the organization for years, according to Gehring. IMPACT Safety’s CEO is now part of LifeCare’s leadership staff, he said, spending time on program rather than things like payroll, HR or grant work. “She was part of the interest we had in their organization,” he said.
The Dayton Arts Alliance in Dayton, Ohio had to meld three organizations into one: the Dayton Philharmonic Orchestra, Dayton Opera and Dayton Ballet. The merger, which took effect July 1, was aided by funding from the Dayton Foundation.
The Dayton Foundation’s Nonprofit Alliance Support Program was established three years ago to provide grants to nonprofits in the community with an interest in significant partnerships, mergers or alliances and is now part of its normal grantmaking. Grants allow for technical assistance to help charities through a formal and deliberate process to see if a type of partnership is appropriate, and if it is, what type would work best.
The ability to sustain an infrastructure of more than 4,000 nonprofits in Dayton “just wasn’t going to happen,” said Dayton Foundation President Mike Parks. “Our intent was to try to be proactive and provide help to local nonprofits in a very changing environment,” he said. Of the six grants that the foundation has awarded, three have resulted in some type of partnership, merger or alliance. “One of the messages we sent through the program was, ultimately, a merger may or may not be the solution for nonprofits,” said Parks, instead exploring a wide variety of solutions that might be appropriate for groups.
“We made a number of grants to help with technical support, a number of them have not worked. This is a significant example of one that has,” said Parks. “It’s difficult. It’s all about leadership. I have to give the board and staff of all three groups the credit,” said Parks, calling it a “stellar example” of hard work, time and effort it takes to complete such an endeavor.
The Dayton Foundation funded the first phase entirely, providing about $6,000, and approximately 70 percent of the $30,000 second phase, leaving the remaining 30 percent split among the three groups. In addition, the foundation committed $500,000 over three years to the alliance and another anonymous national foundation awarded $750,000 over the next three years.
“People’s jobs are at risk. Missions are being challenged. Cultures are being evaluated and challenged. In any circumstance, not everybody gets 100 percent of what they want. In this case, the real focus was really on the end product. That’s really what drove this group,” Parks said. There are some cost savings, which are to be expected, Parks said, but what really drove the groups during this process — and why it was successful — was the focus on mission. “How can we present and produce art better together than we can independently,” he said.
Gehring said it’s vital for nonprofits to be thinking about these things. “If you lose your executive director for whatever reason, that’s a time you should be talking about mergers, but at that point, it’s almost too late and boards panic.” NPT