Press Release

Washington, DC: The tempo of M&A deals among nonprofit organizations is rising, due in large part to a tough economy and association members’ demanding more benefits from fewer memberships, says non-profits lawyer Jerald A. Jacobs, who leads Pillsbury’s Public Practice in Washington.

Jacobs has advised stakeholders in a range of nonprofit mergers, including the recent combination of the American Bankers Association with America’s Community Bankers, and similar deals involving leading health, technology, chemical and pharmaceuticals organizations. Other nonprofits that recently merged include the National Alliance for Autism

“Nonprofit associations, which are traditionally less acquisitive in nature than corporations and inclined to exist as individual groups—even within a single industry or cause—feel they must consolidate in order to become more strategically valuable to dues-payers and donors,” Jacobs says.  

The large number of tax-exempt nonprofits, known as IRS 501(c) (6) or (c) (4) organizations furthers the consolidation trend. According to IRS data and figures from the American Society of Association Executives (ASAE), a Washington organization representing the association profession, there are more than 3,700 groups in the large nonprofit category alone, defined as associations, societies and cause organization with $1 million or more in revenue.

To successfully achieve mergers, nonprofits must navigate varying sets of legal and regulatory protocols, while not losing focus on rallying support for such deals internally.

“In the current down economy, companies are scrutinizing long lists of associations they support through dues and event sponsorships, as well as the costs associated with sending executives to speak at or participate in association events, and asking whether such groups provide enough value, be it educational opportunities or business networking,” Jacobs explains. “Corporations are used to the merger mentality which ostensibly reduces costs by eliminating redundancies and improve profits through expanded offerings, so it’s not surprising executives are beginning to demand the same from the trade and industry associations they support.”

“The challenge for nonprofit organization leaders is that mergers in this sector are harder to pull off in some respects,” notes Jacobs. “Businesses sell a merger by pointing to revenue, cost-cutting, or integrating supply chains. In contrast, nonprofits can have a hard time making a compelling case by the numbers and must be mindful of pursuing the right vision for the new organization and anticipating questions such as who will lead the combined entity, where its headquarters will be located and how two or more organizational cultures blend, decisions that corporate CEOs have the advantage of making based on tangible data such as sales projections or store locations.”

According to Jacobs, the boom in nonprofit mergers also stems from changing ideals and attitudes at the top of organizations. “Nonprofits increasingly see that simply ‘belonging to a club’ has, by itself, diminishing appeal for their members, who expect more from associations in the form of advocacy, business development or awarding certifications. As a result there is heightened awareness of opportunities to strengthen nonprofit organizations’ position on issues and stature within industries by combining.” 

While nonprofit mergers are conceived and presented differently than corporate buyouts - requiring a distinctly different set of skills and strategy—association executives encounter complex regulatory requirements comparable to those facing their commercial counterparts.  “Some states, for example, require nonprofits with members who have voting rights to convene a physical meeting at which a specific majority of members prescribed in state law must vote to approve the action,” Jacobs adds. Other requirements can vary with the nature and location of the organizations involved.

In addition to complying with all applicable laws, the concept of due diligence is crucial in both commercial and nonprofit M&A scenarios. In the wake of major corporate accounting scandals preceding the Sarbanes-Oxley Act (SOX), many nonprofit organizations strengthened their governance programs by modeling policies on SOX-inspired corporate measures ensuring transparency, ethical conduct and accountability, including making due diligence a strict prerequisite for M&A ventures. According to Jacobs, nonprofit boards members further rely on due diligence to mange their personal liability risks, as courts have ruled that board members can be accountable for damages in mergers that were not vetted appropriately with adequate disclosures.

Jacobs advises nonprofits contemplating mergers to carefully consider risks and objectives and seek experienced insight on planning and rallying support from members and contributors. “A merger is usually the most sophisticated transaction a nonprofit faces, and the time and energy required to close them alone can deter management from moving forward, particularly if an organization’s volunteer staff and leadership shoulder the entire process internally,” he explains. “The most successful mergers take shape with all stakeholders in mind, from staff and executives to members, and have the strategic goal of creating a new and more vibrant organization better positioned to serve its community’s needs for the long term.”

Pillsbury’s Nonprofit Organizations practice represents more than 200 national, regional and local organizations, including a variety of trade associations, professional societies, charities, interest groups and philanthropic organizations. Pillsbury clients benefit from the firm’s incomparable experience and decades-long commitment to nonprofit matters. Attorneys in the practice advise on subjects including antitrust, M&A transactions, governance, tax exemption, litigation, technology, health care, legislative and regulatory issues and intellectual property.

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