The Ultimate Guide to Nonprofit Mergers: From Initial Inquiry to Integration

Nonprofit mergers represent one of the most significant strategic decisions an organization can make, offering the potential to amplify mission impact, enhance operational efficiency, and strengthen financial stability. While the concept might seem straightforward, the reality involves a complex process requiring careful planning, stakeholder engagement, and expert guidance. Whether driven by the desire to eliminate operational redundancies, expand service offerings, or ensure long-term sustainability, nonprofit mergers demand thorough consideration of mission alignment, cultural compatibility, and the unique regulatory requirements that govern tax-exempt organizations.

This article discusses nonprofit mergers generally, distinguishing them from for-profit mergers between corporations. However, it’s important to remember that there are several types of nonprofits, such as charities and associations. Both charities and associations are nonprofits, but they are unique in their missions, source of funding, and other qualities.

Charities are nonprofits that exist to serve a humanitarian or philanthropic cause for the general public, whereas associations primarily exist to serve the economic, social, or scientific needs of their members. Charities receive public support through donations and grants, whereas associations’ primary source of revenue is from dues-paying members.

This article will refer to nonprofits generally, inclusive of both charities and associations.

What is a nonprofit merger?

A nonprofit merger occurs when two nonprofit organizations combine their assets, liabilities, and programs to form a new legal entity operating under one legal name. A nonprofit merger can be an outcome of two or more nonprofit leaders seeing an opportunity for collaboration, but it doesn’t have to be. Oftentimes, joint ventures, partnerships, or simple contracts are sufficient to accomplish the leaders’ objectives.

Why do nonprofits merge?

Increased efficiency

In the case of associations, members who belong to two or more competing organizations may prefer to deal with just one, consolidating their dues, volunteer leadership commitments, sources of information, networking opportunities, and meetings. Likewise, donors passionate about one cause may prefer to make one donation instead of two. Meanwhile, the staff from competing organizations see that an industry or profession can be more efficiently represented by one strong, robust association whose influence is greater.

Enhanced services

Combining the programming, member engagement, geographic reach, and advocacy efforts of multiple organizations can bring about new energy, expertise, and experience, not to mention economies of scale.

Improved financial position

The long-term financial stability offered by reductions in overhead and shared resources, and succession planning for changes in long-term leadership, offers additional reasons to consider a merger.

Mission Expansion

Organizations with complementary missions may see merging as a strategic growth opportunity that enhances their combined impact and effectiveness.

No matter what the reason is for a nonprofit to consider a merger, it is important that the nonprofit leaders (staff leader and board of directors) can clearly, succinctly, and convincingly communicate why the entity is exploring a merger. The objective of the merger exploration exercise is critical to keep front and center, as it is a lengthy process that can be disruptive to operations, revenue/donations, and the organization’s ability to meet its short-term objectives.

Challenges to nonprofit mergers

Nonprofit mergers are not for the faint of heart. They are sophisticated business transactions typically requiring the specialized expertise of a team of lawyers, consultants, and financial professionals. Additionally, merging nonprofits requires great oversight due to the tax-exempt status granted to nonprofits by government agencies. It is of paramount importance that nothing in the legal transaction calls into question the newly-merged organization’s tax-exempt status.

Mission alignment, trust, and curiosity about how two entities could enhance their impact by working together are important components to weigh carefully before proceeding with pre-merger conversations or actions.

Next, we’ll review the nonprofit merger process.

The process of merging

Step 1: Inquiry

Typically, volunteer leaders at organization A, with the support of senior staff, initiate informal discussions about a potential merger with leaders from organization B. Before approaching organization B, leaders from organization A discuss and analyze how an alliance or merger will further the organization’s mission. Sometimes, the internal discussions are instigated by the approach of a potential merger partner; other times, the discussion originates internally, perhaps as part of a strategic planning process or as a result of a crisis, financial or otherwise, facing the organization.

Once leaders from the potential merging organizations are in conversation with each other, it is critical that all parties maintain a posture of openness, objectivity, and curiosity. If one side engages in hard questions or takes an immediately entrenched position, the process can be derailed.

If it is clear that there is mutual interest in serious discussions, the parties should consider engaging in a brief, one-page written agreement signed on behalf of each organization. The agreement should denote that:

• The conversations are confidential
• No commitments are being made
• No liability arises if the talks are discontinued, and
• How any costs borne will be handled.

Oftentimes, organizations are supported during this initial phase by a lawyer or independent consultant who is experienced in guiding nonprofits through merger conversations. Engaging a qualified consultant at this stage can ensure structure and purpose are adhered to while still keeping the conversations informal. Any sense of competition or advantage can be mitigated, and conversations can be diplomatically steered in a direction that identifies benefits and obstacles rather than amplifying peripheral issues not pertinent to the situation.

If this phase concludes successfully, the outcome is a memorandum of understanding (MOU), term sheet, or list of issues on which there is agreement, and a list of issues on which there is not yet agreement. The MOU will also define the responsibilities and expectations of the parties and identify next steps in the merger conversation. Each party agrees to share the MOU with its governing body for formal approval before proceeding with merger discussions.

Importantly, the MOU does not legally bind the organizations to complete the merger. Rather, it represents an indication of both parties’ agreement to cooperate and work in good faith to complete due diligence.

Step 2: Consideration

Several items must be considered when evaluating a potential merger and before initiating formal legal proceedings. A qualified consultant will walk the parties through an examination of the following considerations.

Mission alignment

• Do our missions, visions, and core values genuinely complement and strengthen each other, or would combining them require compromising what makes each organization unique?
• Will this merger amplify our shared impact and help us better serve our common purpose, or are we merging for other reasons that might dilute our effectiveness?
• Can we envision a unified path forward where both organizations’ stakeholders would recognize and support the combined mission, without confusion about our joint objectives?

Complementary strengths

• What unique strengths, resources, or expertise does each organization bring that the other currently lacks?
• How can combining these different capabilities create a stronger, more comprehensive organization that neither could achieve alone?

Financial health

• Is each organization financially stable enough that the merger strengthens rather than burdens the combined entity?

Leadership & culture

• Are our leadership styles, management practices, and organizational cultures compatible enough to create a cohesive work environment?
• How compatible are our Boards/Trustees? Management/staff leadership?
• How receptive are we to giving up some degree of autonomy?

Risk assessment

• What are the key financial, operational, legal, and reputational risks of this merger, and how can we mitigate them?

Long-term strategy

• Do we share a unified vision for the merged organization’s future goals, success metrics, and growth strategy?

Stakeholder support

• Do our key stakeholders, including board members, staff, donors, and beneficiaries, understand and support this merger?
• How have we made sharing feedback about the merger inviting and accessible to all stakeholder groups?
• What reservations have we heard (if any), and how does our plan address them?

Step 3: Due Diligence

Once the governing bodies of both organizations have indicated their interest in a formal merger proposal, the due diligence period commences. This is an intense and expensive phase of the merger process, so engaging in this level of inquiry is delayed until it is apparent that it is more likely than not that a merger will be pursued.

In the due diligence phase, attorneys and accountants conduct a legal and financial risk assessment. In legal due diligence, the parties examine each other’s legal status and risk; in financial due diligence, the parties examine each other’s financial position and risks, typically based on past audited financial reports.

The purpose of this phase is to identify any issues that could complicate the merger. The two entities offer a complete disclosure of assets, liabilities, and any potential legal concerns, reviewing all of the following for both organizations:

• Organizational bylaws and governance structures
• Articles of Incorporation
• Organizational charts
• Copies of all memoranda of understanding (MOUs), contracts, leases, or agreements
• List of all officers of the company and board members
• Copies of all board minutes (past five years)
• Tax documents - 990’s (past three years), tax exemption letter, and unrelated business income
• Insurance documents
• Personnel documents - human resources policies, contractor agreements, vendor agreements, policies, list of consultants, compensation plan, etc.
• IT systems and data management
• Audited financial statement and management letter - past three years, all assets, all liabilities, all grant agreements
• Capital real estate - leases, deeds, zoning permits
• Licenses, accreditations, and provider agreements with state or county entities
• Statement of threatened or pending litigation, description of same, and outcomes for the last three years
• Banking information
• List of all regulatory bodies the organization may be subject to

Legal considerations that merging nonprofits must address include:

• Board approval: Nonprofits must obtain board of directors approval before proceeding with a merger to ensure alignment with organizational mission and stakeholder interests.
• State laws: Nonprofits must comply with state-specific merger regulations, which may require filing documents, obtaining state attorney general approval, and following prescribed legal procedures.
• Asset Transfer and Restrictions: Charitable assets must be transferred in compliance with donor restrictions and state laws, ensuring donated funds continue to serve their intended purposes after the merger.
• *Tax-Exempt Status: *The merged entity must maintain tax-exempt status by continuing to meet federal and state requirements, including IRS operational and organizational standards.

Importantly, the timeliness of and messaging to all stakeholder groups must be handled with great care. Staff, volunteers, donors, and funders need time to process what the merger could mean for their roles and futures. Organizational leadership should consult with service recipients, beneficiaries, community partners, and collaborators. All stakeholders have a desire for transparency and a need to be trusted players in the merger process. Initially, it is unlikely that all parties will have a willingness to embrace change on behalf of the mission; however, organizational leadership plays a vital role in overcoming resistance.

Sources of consternation include, but are not limited to, the following:

• Cultural mismatch
• Founding leaders may be fearful of losing their legacy
• Human resources-related concerns such as layoffs, shake-ups in the organizational chart, and changes to employee benefits
• Changes in organizational brand

To contend with objections, organizational leaders should set aside the time to routinely check in with key stakeholders, empathizing with their concerns. They should develop a detailed integration plan that establishes expectations for how the organizations will approach negotiations about certain issues, as well as a timeline for integration activities. How to best align programs and services, merge financial systems and processes, integrate HR systems and policies, and consolidate IT systems and data are all critical components of the integration plan. Developing a unified branding and communication strategy, a plan for office and facility integration, and a unified governance structure requires time-intensive, dedicated thought by multiple stakeholders.

Step Four: Merger Agreement

Once all parties are satisfied with the results of the due diligence process, the next step is to draft and negotiate a merger agreement, which sets out the terms and conditions of the merger. The size and complexity of the merging entities will determine the size and complexity of the merger agreement. At a minimum, the agreement should address the rights and obligations of each merging entity, the understandings each organization has that, together, form the foundation of the merger, and what approvals must be given by whom before the merger can become official.

The agreement may also include attachments such as copies of a new charter, bylaws, provisions for integrating programs, services, and systems, the identification of initial directors, organizational charts and key staff members, etc. It is expected that the merger agreement will be closely negotiated and proceed through several drafts before all parties are satisfied.

Step Five: Approvals

In the United States, state law will dictate the required nonprofit merger approval process, however, it typically involves two steps: board approval and membership approval. The board will review the legal and financial due diligence reports, the merger agreement, the membership approval materials, and the proposed state merger filings.

On or just before the proposed effective date of the merger, filings will be made in the state where each merging organization is incorporated. Once accepted, the merger is legally complete, and the integration process can begin in earnest.

Successfully navigating a nonprofit merger requires patience, expertise, and unwavering commitment to transparency throughout the process. While the journey from initial inquiry to final integration can be lengthy and resource-intensive, organizations that approach merger discussions with clear objectives, thorough due diligence, and genuine care for all stakeholders often find themselves better positioned to fulfill their missions and serve their communities. The key to a successful nonprofit merger lies not just in the technical and legal execution, but in maintaining focus on the ultimate goal: creating a stronger, more impactful organization that can achieve what neither entity could accomplish alone.

For nonprofits considering this path, investing in experienced legal and consulting support while prioritizing open communication with all stakeholders will help ensure the merger serves the greater good that both organizations set out to achieve.

At Open Eye, we are experienced in helping nonprofits merge successfully. Contact us to set up a meeting in which we can lend our expertise to your project.