Just like other businesses, nonprofits sometimes may need to think about potential merger and acquisition issues. In our legal practice, we have handled a number of affiliation deals or asset acquisitions involving nonprofits. This experience is consistent with what other sources report. Over the last five to ten years, the U.S. nonprofit sector has experienced a modest, but measurable, increase in mergers and strategic alliances according to data from resources such as the National Council of Nonprofits.

While mergers and acquisitions among nonprofits are perhaps less common that in the for-profit sector, the data suggests a gradual upward trend in both formal mergers and informal collaborations. This article discusses some of the reasons to consider a nonprofit merger or affiliation and what a board should look at in considering such transactions.

What are the Factors Driving Nonprofit Mergers?

Nonprofit mergers can arise from financial challenges or increased efficiencies. That can also result from more strategic rather than reactive criteria, with organizations proactively seeking partnerships to expand services, programs, or geographic reach. The frequency and visibility of such consolidations have grown, particularly among nonprofit organizations facing financial pressures, overlapping missions, or opportunities to enhance impact. In addition, post-pandemic financial pressures have accelerated merger discussions, especially among small and mid-sized nonprofits.

Some of the factors that contribute to nonprofit mergers include:

Financial Sustainability:

Many nonprofits face chronic underfunding, reliance on restricted grants, and rising operational costs, and mergers can offer:

• Economies of scale
• Shared administrative functions
• Improved fundraising capacity or efficiency

Mission Alignment and Impact: Organizations with overlapping missions may merge to:

• Avoid duplication of services
• Increase programmatic reach
• Strengthen advocacy efforts

Leadership Transitions: Retirement or departure of founding or long-term leaders often prompts boards to consider mergers as part of succession planning. This has been a significant factor as the nonprofit industry has shed a generation of leadership.

Funders’ Influence:

Philanthropic foundations, significant individual donors, and government agencies increasingly encourage collaboration and consolidation to:

• Maximize return on investment
• Reduce fragmentation in service delivery
• Promote systemic change

COVID-19 Pandemic Effects:

The pandemic exposed a number of vulnerabilities in nonprofit business models, leading to:

• Increased urgency for financial resilience
• Greater openness to strategic partnerships
• Accelerated digital transformation and shared infrastructure

Regulatory and Compliance Pressures: Smaller nonprofits, in particular, may struggle with compliance, reporting, and governance standards. Merging with a larger entity can ease these burdens. 

What Fiduciary Duties Does a Nonprofit Board Always Owe to its Organization?

Fiduciary duties are the legal and ethical obligations that board members owe to the nonprofit organization. These duties are rooted in trust and accountability and are essential to maintaining the integrity of the organization.

There are three key fiduciary duties relevant to nonprofit governance:

• Duty of Care
• Duty of Loyalty
• Duty of Obedience

Duty of Care

Requires board members to act with diligence and prudence, prepare for and actively participate in meetings, review financial and legal documents, and make informed decisions. This fiduciary duty emphasizes cautious and sound judgment, especially in financial decisions. In mergers and acquisitions, the board needs to evaluate risks and liabilities carefully. This includes conducting appropriate due diligence and understanding implications and risk factors.

Duty of Loyalty

This duty mandates that board members prioritize the nonprofit’s interests over their own, disclose conflicts and recuse themselves when necessary, and avoid seeking personal gain as opposed to benefit to the nonprofit. Board members must keep sensitive information confidential and avoid using insider knowledge for personal gain. This is critical during merger negotiations. Board members must be forthright about any information that could influence decisions. Disclosure supports transparency and governance. Transparency and abstention from conflicted votes in merger and acquisition discussions are essential.

Duty of Obedience

Requires compliance with laws and regulations, adherence to mission and bylaws, and honoring donor restrictions. In mergers and acquisitions, ensure the merger aligns with the mission and preserves charitable assets.

Unique Considerations for Nonprofit Boards Considering a Merger or Acquisition

Nonprofit mergers do not involve, for example, paying to acquire another business opportunity and valuing the same. Instead, for true mergers, they involve questions of culture, fit, and alignment. Does the acquired entity fit into the mission, vision, and values of the acquiring entity? Do the entities share values and culture that will help the merger to succeed?

Boards considering such questions need to be clear-eyed about what will be the governing structure of the final merger entity. In a merger of more equal entities, what will the board representation for each original entity be in its end state? In a merger of “unequals” if you will, does the acquired entity still have a separate identity or governance or is it being fully absorbed? In the later situation, sometimes the structure is more of a corporate dissolution of the smaller entity along with a formal transfer of assets to the surviving entity in compliance with IRS 501c3 requirements with respect to winddown of 501c3 related entities.

Some of the questions a nonprofit board of directors should be asking itself in the context of a merger or acquisition M&A transaction, which may be particular to whether the organization will be the “merged-out” entity or the “merged” entity that will carry forward after the transaction is completed, are as follows:

• Will mission of the merged-out organization be carried on by merged organization?
• Will the resources of the merged organization be sufficient to carry on mission?
• Will the name of the organization survive a merger?
• What about the headquarters for the merged organization? Where will the organization be based?
• Are there any donor or funding issues that would be affected by a merger?
• What programs will survive the merger?
• Who will lead the merged organization?
• What about potential workforce changes or reductions due to a merger?
• What are potential synergies to be gained by a merger?
• What cost savings might result?
• What other particular efficiencies are to be gained by combining?

Conclusion

While not a universal solution, mergers can help nonprofits better serve their communities and adapt to a changing landscape through increased economic efficiency in particular. Getting to that successful end state requires foresight, diligence, and care. Organizations considering a merger should engage in thorough due diligence, consult legal and financial experts, and prioritize the integrity of their mission, vision, and values throughout the process.

For more information or help with nonprofit board governance strategies, training, or legal compliance, please feel free to reach out Timothy Hughes at (703) 526-5582, thughes@beankinney.com or Doug Taylor, at (703) 526-5586, rdtaylor@beankinney.com. We work with nonprofits throughout Virginia, Maryland, and D.C., and we are happy to help your board become the asset it was meant to be.

This article is for informational purposes only and does not contain or convey legal advice. Consult an attorney. Any views or opinions expressed herein are those of the author and are not necessarily the views of the firm or any client of the firm.