Why Nonprofits Should Pursue a Business-like M&A Strategy

COMMENTARY Jobs and Labor

Why Nonprofits Should Pursue a Business-like M&A Strategy

Feb 9th, 2021 6 min read
COMMENTARY BY
Andrew McIndoe

Vice President of Development

Andrew is the Vice President of Development at The Heritage Foundation.
Through M&A, we can fill existing gaps in roles and skill sets needed to continue growing. Klaus Vedfelt/Getty Images

Key Takeaways

To whatever extent you can convince your nonprofit’s leadership to initiate strategic partnerships, they are opportunities well-worth pursuing.

When it comes to successful for-profits, M&A continually stands out as a distinguishing factor.

Let’s bring those best practices and their payoffs into our work as nonprofit executives and take our organizations to the next level.

At this point in the Covid-19 lockdown, Disney princess films are playing virtually non-stop at my house. But while my daughter’s been captivated by the adventures of Elsa, Belle, and Rapunzel, I’ve been thinking about what nonprofits can learn from Disney’s executive leadership.

The Walt Disney Company entered the entertainment world nearly 100 years ago. It was a modest entrance: a short cartoon starring Mickey Mouse as Steamboat Willie. In every decade since, Disney has consistently created hit productions, pushed the boundaries of animation, and solidified itself as a household name.

But Disney’s success isn’t built on heartwarming stories alone; it also stems from mastering the art of forming successful corporate partnerships.

Disney demonstrated expertise in collaboration early on. In 1932, it struck an exclusive deal with Technicolor on color cartoons. In 1979, it initiated a joint venture with Paramount Pictures. And in 1995, it executed its largest move yet, buying ABC for $19 billion.

Yet that was just the beginning. When Bob Iger took the helm as CEO in 2005, Disney’s partnering went to a whole new level. Facing newfound competition from other studios, Iger took an even more aggressive approach to mergers and acquisitions (M&A). Over the next 15 years, he brought Pixar, Marvel, Lucasfilm (Star Wars), and 20th Century Fox into the corporate fold. In doing so, he increased Disney’s net annual income by more than 330% ($8.5 billion).

Iger has proved that well-timed M&A with the right partner can take your business to new heights of success. Such moves are commonplace throughout the business world. So why do so few nonprofits pursue a similar strategy? Why are mergers reserved for last ditch efforts to stay alive? What’s preventing nonprofits reaping the same rewards from proactive organizational partnerships?

What Obstacles Stand in the Way of Nonprofit M&A?

For starters, achieving the level of missional alignment required for nonprofit M&A is more difficult. Nonprofits are more reliant on having a trusted brand to garner support, necessitating an even greater degree of culture fit when uniting two organizations. This can make nonprofit M&A opportunities seem sparse from the get-go.

Next, there’s not the same incentive structure that for-profit boards benefit from. In the corporate world, a buy-out can mean a big pay day and boosted stock price. In the nonprofit world, a merger can mean that the acquired board dissolves - they’re voting themselves out of a meaningful role.

It can also be intimidating to initiate M&A knowing that you may have to eliminate duplicate efforts. When you conjoin institutions, each side might have to come to the table with programs they’re willing to scale back. Or even general and administrative staff that might have to be let go.

These three obstacles can dissuade nonprofit leaders from ever considering M&A in the first place. But we need to realize that organic growth can take our institutions only so far. We don’t have a monopoly on innovation and new ideas. Maybe your nonprofit excels at the same valuable programs you’ve had from your launch, but M&A can open doors that simply nothing else can.

Why Nonprofits Need M&A Just as Much as Businesses

One of the chief benefits of M&A is pooling talent and resources en masse. It’s impossible to be good at everything. Through M&A, we can fill existing gaps in roles and skill sets needed to continue growing. The end result will be a sum greater than its separate, pre-existing parts.

Some M&A is catalyzed by leadership changes. Perhaps your founder has carried your organization for decades but neglected to train leaders internally who are capable of taking his place. Or, as your founder nears retirement, she sees another dynamic leader at a like-minded organization who would be an apt heir. Making an acquisition in order to promote one of the acquired executives as your new CEO/president can be a viable option, too. 

M&A is also particularly useful to outsize competition in a saturated market, reach new audiences, and stay afloat during financial struggle. As you encourage your nonprofit leadership to have an M&A mentality, the Boston Consulting Group’s growth share matrix is a great place to start. BGC’s four-quadrant chart can help you sort your current programs into degrees of “profitability.” This exercise reveals core capabilities and future needs which your board can then decide to either build internally or acquire from without. 

Initiating Conversations about M&A

Ideally, these discussions are best initiated by smart questions and insights from Board members who have a growth mindset. They should be the ones proactively asking your executives those SWOT and BCG matrix questions to get the gears turning on strategic decisions. And they should be the ones asking ambitious, hypothetical questions about your ideal partners for M&A. Or even asking you which organizations you would readily let acquire you. 

There are no hostile takeovers in the nonprofit sector, so it falls to your CEO and Board to initiate any M&A conversations with other organizations. Once the ball gets rolling, they’ll also be responsible for testing the organizations’ underlying assumptions about why the M&A is a good idea. If you want to keep your Board members loyal during the major shifts, be sure to keep them fully apprised of any new developments.

Your donors are also a key constituency. Before initiating an M&A, it’s wise to conduct surveys and focus groups to discern the perceived brand fit between your organization and the prospective partner. And, of course, to determine how such an M&A would impact your donors’ giving. Maybe they’ll increase giving after seeing new opportunities emerge to expand your organization’s reach. Or maybe they give to both organizations, but would cut back on perceived duplicate giving after the merger.

Common Mistakes to Avoid in M&A

Once you’ve decided that a merger or acquisition is the best vehicle to take your nonprofit to the next level, be sure to devote all the time and energy needed to execute the process well.

As much as I advocate for an aggressive eye toward M&A, too many executives have rushed into one. Counterintuitively, the best time to explore and encourage these opportunities is when your organization is experiencing success. Major changes done reactively in times of crisis can result in poor brand fit, leadership formation, and programmatic decisions - the three fears that I mentioned prevent nonprofits from pursuing mergers in the first place. Also, be sure to generate buy-in from all levels of staff at each organization. Doing so is crucial to sustaining morale, engagement, and loyalty for a smooth transition.

Lastly, do all that you can to put solid plans in place for integration before starting to merge. Contingency plan for every scenario; allow for twice as much time as you think you’ll need, and seek the wise counsel of leaders who have completed M&As before.

Other Nonprofit Partnership Opportunities

If you’re not ready to make the leap to a full-fledged merger or acquisition, there other ways to achieve similar benefits.

Start by sharing best practices through coalitions of others in your industry. Although I certainly enjoy a friendly rivalry with other nonprofits that are competing for donations, prioritize forming strong partnerships with people who share your convictions for solving the same societal issues. For example, my organization has gathered think tank leaders from across the nation at our Resource Bank conference for over 40 years.

Some industries have gone as far as to share services with each other. With a shared work space, technology infrastructure, or administrative staff, you can eliminate duplicate costs without fully intertwining your programs.

Then there are formal partnerships and joint ventures. The most significant type of partnership short of a complete M&A, these more public initiatives can serve as a great trial run for how your brands, cultures, and programs will mesh.

To whatever extent you can convince your nonprofit’s leadership to initiate strategic partnerships, they are opportunities well-worth pursuing. When it comes to successful for-profits, M&A continually stands out as a distinguishing factor. Let’s bring those best practices and their payoffs into our work as nonprofit executives and take our organizations to the next level.

This piece originally appeared in The Heritage Insider