Benevolent Takeovers, ctd.

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In a previous post, I wrote about the potential for mergers and acquisitions in the non-profit sector and a project I am working on towards that end.  So how does one go about finding a suitable target?

First, I found all of the organizations in NYC that operate in the same business as the acquiring organization and looked up their Form 990, the tax form that must be filled out by any 501(c)(3) non-profit organization with more than $25,000 in revenue.  By law, these forms must be public.  I located the majority of them using Guidestar and began by analyzing the following criteria:

  • Revenues - the principal reason for absorbing another organization is to expand your reach.  The financial metric that corresponds to this is top-line revenues, which represents the money to be invested in organizational operations.  In the non-profit world, revenues are comprised of grants, donations and fees.  No matter what the source, this is what the acquiring organization stands to gain; the target’s grants, donors and fees would presumably carry over into the new organization.
  • Net Assets – this is essentially the cost of acquisition.  It represents the leftover assets of the organization, after liabilities have been paid.  If this value is too much for the acquiring organization to pay for out of their own assets, then they have to look to smaller organizations.
  • Revenue-to-Net Asset ratio – this gives you some perspective about the organizations you are purchasing.  If this ratio is high for a target, you are getting more bank for your buck, in the sense that the amount of revenue you acquire would be greater relative to the amount you’d have to spend to buy the assets.
  • Burn Rate - for organizations that are currently in trouble (i.e. carrying a net operating loss), this measure estimates the length of time they can survive if the continue in their current state.  It is basically net assets over net operating loss, thus telling you that if the organization continues losing this amount of money, it will burn through its assets in x years.
  • Operational Efficiency – this measure refers to the percentage of total expenses spent on program services , as opposed to overhead and fundraising.  Organizations that have high efficiency ratios can boast, for example, that 90 cents of every dollar is spent directly on program beneficiaries, and they do so loudly.

Using these, I filtered down the list of organizations to those that were viable based on our criteria.  Revenues must be large enough to make the transaction worthwhile in terms of time and money spent.  Net assets must be affordable enough for the acquiring organization.  The burn rate will be a proxy for organizations that are in greater danger of going under and may thus be open to being absorbed by another organization.  And operational efficiency gives an idea of where money can be saved.

There are plenty of valid criticisms of using operational efficiency as a non-profit metric, particularly for organizations like Kiva or Acumen Fund.  The most trenchant criticism is that efficiency has no direct correlation with impact.  But for the purposes of my project, operational efficiency is an important deciding factor.  For any target organization that is less efficient than the acquirer, the difference represents the savings that can be gained through the combination, which can be particularly attractive to funders and the organization itself, since it will pay a lot of money to expand its reach.

The filtered list only represents the viable.  Next I must figure out which organizations are ideal.  Here I will have to dig deeper into funding sources, governance and the people involved.  Stay tuned; that is when things may start to get dirty.

Posted on March 8th 2010 in ideas

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