Benevolent Takeovers, ctd.

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Earlier this year, I pondered the idea of non-profit mergers and acquisitions, and spoke of a small consulting project I was doing for a local non-profit, whereby I was tasked to explore the potential for such benevolent takeovers.

I analyzed organizations along criteria that included net asset balances, revenues, and efficiency ratios.  Out of the 60 similar service providers analyzed, I found seven that exhibited the minimum criteria for a takeover target.  Firstly, they were organizations with small asset balances, which meant that they were not only affordable but also in danger of going under; a few years of operating losses could wipe them out.  Second, these organizations were less efficient than my client organization, meaning they spent proportionally more on administrative expenses.  Presumably, if my client took over an organization’s revenue and operations, they would be able to do so at a lower cost and pocket the difference.  This is what is often referred to by business folk as synergies.

With the list narrowed down to seven, next came the tough political stuff: founders, funders and boards.  In the corporate world, mergers and acquisitions are often beneficial to the target company, since owners and management usually receive big payouts and a chance for the company to expand.  But in the non-profit world, unique barriers exist.

Exhibit A: Fame and Founderitis

Non-profit leaders are far more possessive about their organizations than corporate leaders.  Each wants to be the leader of the small grassroots organization, and will scoff at the notion of bringing outsiders in to lead or absorbing themselves into another larger bureaucracy.  Founders are often worse.  Among our list of organizations, we immediately scratched one because the family that founded the organization still had representation on the board.  It was not worth entertaining the idea of asking someone to take their name off of the building, even if we could promise better service and a path out of fiscal disaster.

Exhibit B: There’s always another funder

A struggling organization will look fiercely for new funders and can continue to tread water so long as it has the energy to keep chasing the dollars.  Fortunately, there are a lot of options for these organizations: fee for services, foundations, government grants, fundraising events, individual donations.  Only when all of these have been exhausted will the opportunity arise to discuss a takeover.

In the case of the organization’s under discussion, most were heavily government funded and shared many sources with my client.  As such, there is room for discussions with the city funders, who may be able to recognize one organization’s weaknesses vis-a-vis another one’s strengths.  The CEO of my client has already been in discussion with various city officials who are looking to reapportion their grants.  This could ultimately prove to be the key to loosening the grip over these struggling organizations.

Exhibit C: the politics

At the same time, organization’s that are heavily government funded might exhibit signs of patronage.  Their continued funding and support may come directly from strong relationships with important government officials and not much else.  One of the organizations that was in the worst shape was unfortunately dead-on-arrival because the board was full of community leaders and others with ties to government.  We felt there was little chance of getting them off of the government grant-roll.

Finding the one

The only thing that can overcome these hurdles is desperation, the reality that an organization will not survive much longer without some outside help.  For that, we had to narrow down the list to organizations that had lost money in recent years and didn’t have much of an asset cushion to survive similar losses.

Ultimately, only one organization fit the bill of an ideal takeover target.  It has low asset balances, had struggled in recent years, shares many funders with my client, and most importantly, the CEO was about to retire, creating a unique opportunity to enter into discussions.

Starting with 60 organizations and ending with one doesn’t particularly seem like a good rate of return, but I still stand behind the idea of non-profit mergers and acquisitions.  And there are other options, too.  While some of the organizations were too entrenched or too indebted to be considered takeover targets, we did flag two as potential management agreement targets.  Under such a scenario, our more efficient client could manage the operations of a piece of another organization’s business, thus doing it cheaper and potentially helping them to get out of their fiscal woes.

The point is that there are gains to at least sharing capacity across the non-profit sector and we need to find ways to allocate it best.  Many peoples’ lives depend on it.

Posted on May 28th 2010 in ideas

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