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Have You Heard the Word Merger Lately?

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I have. Almost everywhere I go, nonprofit community leaders are discussing working together or collaborating with other organizations. Just over a year ago, I wrote an article entitled, “Would Your Nonprofit Benefit from an Alliance or Merger?” That same article is even more important and valuable to readers today. We have been fielding calls from clients and soon-to-be clients to provide input on how a merger or affiliation could affect them. Should you be considering a merger or acquisition strategy, and, if so, how do you get ready to acquire or affiliate with another agency or organization?

The challenges of doing business certainly haven’t lessened in the last 12 months. Regulatory pressures have increased and certain government agencies are changing the way they will provide funding in the very near future. Mercadien has routinely provided audit, tax and accounting services to agencies that receive funding from the state of New Jersey in the form of cost reimbursement contracts. That means if the agency spends $1 to assist its consumer population, the State will reimburse them the same $1 to cover their cost. From where did the State get its funds? Simply put, it billed Medicaid for the services provided to the consumers of these agencies.

However, the State has decided that it is more beneficial to have the provider agencies bill Medicaid directly. This transformation has shocked the provider community. Now, agencies have to set up billing procedures like a doctor’s office or hospital treatment center to get reimbursed for their efforts. That requires quite a bit of change and dollars to fund new software platforms, staff positions, different accounting processes, etc. If you are affected by this new paradigm, is your organization ready?

Some of you reading this may be in the process of addressing this change. For the rest of the readership, I use this as an example only of one change that can have a profound and possibly deathly impact to an organization. Yes, deathly, because many organizations don’t have reserves available to cover cash flow shortages that will likely take place during the beginning of the transition period. Does your organization have net assets available to fund new transportation vehicles in the future, or to afford new capital purchases or significant repairs and replacements?

Every agency’s situation is different. Historically, too many nonprofit organizations rely on one source of funding or donor type, such as government grants, for a majority of their revenue. Some realize the peril to their viability from this in today’s economic climate. Indeed, for many, government money is already becoming increasingly scarce, as are dollars from private donors. Smaller agencies relying on one donor source may find it especially difficult to survive in a new revenue model. Funding diversification is perhaps one of the most appealing reasons for alliances and mergers. They present a great opportunity to tap into other funding sources to ensure you remain equipped to serve your constituency.

If you have had a significant change in your financial operations, our professionals can prepare a detailed analysis to help you quantify the impact on your organization. If the writing is already on the wall, it is key to reach out sooner, rather than later, to another organization to pursue collaborative efforts. You need to find a candidate that compliments your operations and has a matching culture. If you are seriously thinking about a merger or affiliation, some things to think about in the due diligence process include:

  • Viability of assets – do they exist, are they impaired, are liens outstanding;
  • Hidden liabilities of a merger candidate – is there an unknown liability that exists, loan covenants, accuracy of reported liabilities;
  • Long-term contracts with lenders, lessors, funders, government agencies, vendors and customers;
  • Personnel agreements and benefits; and
  • Impact on tax exemption, financial reporting, etc.

Mercadien’s Nonprofit Services Group has extensive experience assisting nonprofits with the evaluation of the cost and strategic impact of a potential alliance, and with guiding them through the actual merger process. Contact Sherise Ritter at sritter@mercadien.com or 609-689-9700 to learn more.

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