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CapinCrouse has been a thought leader in the not-for-profit accounting world for more than 35 years. We have always felt compelled to share this expertise not only with our clients but with the entire not-for-profit community.
Financial Manager's Tips for Tough Times - Part 4
Email Alert
CapinCrouse LLP
If your nonprofit has been challenged by these tough economic times, you're not alone. While that's cold comfort, there are many ways financial managers can keep their organizations on track. We've helped our clients consider ways to increase their efficiency, focus on the key parts of their strategic mission and restructure their balance sheets. But sometimes nonprofits have to look to more innovative ways to survive - and perhaps even thrive.
TAKE STRATEGIC INVENTORY
Start by making a brutally frank appraisal of your organization. What are its strengths? What do you do better than many or most other organizations?
Maybe the strength of your organization lies in possessing rare knowledge or experience. Missionary organizations might have unique understanding of particular cultures or language groups. Urban missions might be gifted in working with gangs or other disenfranchised youth.
Perhaps your competitive strength lies in geography: you're the only church in a region or have the only mission-as-business operation in a country closed to evangelism.
Maybe your strength lies in a particularly talented individual or in a team of people that works well together to perform a needed task for the Kingdom. Maybe you've created a tool - a book, a seminar, a training technique - that works exceptionally well.
LEVERAGE YOUR STRENGTHS
Can you license or sell your key technology or tool? Some organizations have created seminar systems that others would be pleased to utilize, adapt or call their own. A publisher might give your organization a royalty advance in exchange for exclusive rights to use and promote your material. You may be able to negotiate the retention of usage rights for your organization, even if the tool is sold to another. (While this step involves giving your "baby" to someone else, remember that Moses' mother did that for him and it turned out okay.)
Or consider what other groups with similar theology and goals are doing in a similar or allied field. Could your groups join forces to preserve the strengths you've identified? Would another group understand and value your skills and abilities? Would they be willing to absorb your weaknesses to benefit from your strengths?
COMBINE OPERATIONS TO CUT COSTS
Linkages can take many forms, from informal agreements to full-fledged mergers. But if you're thinking about restructuring as a way to cushion the blows of financial distress, you probably aren't going to benefit from the least formal ways of working together. So agreements to distribute each other's evangelism materials, for example, aren't going to cut it.
Agreements to work together will likely involve discomfort, maybe even pain. But if you're rapidly running out of ways to keep your organization afloat, they are almost certainly preferable to bankruptcy.
To benefit financially, you must focus on ways of combining operations that make or save money.
Consider overhead costs. If another similar organization has already cut staff, they might have surplus space in their headquarters. Can two live as cheaply as one? Sometimes. Moving in with them can save occupancy costs, assuming that your own building can be sold, leased or sublet.
If your areas of operation overlap, perhaps you could combine supervision in the field. That could cut transportation costs or allow you to cut a staff member. While painful, that alternative is better than risking the solvency of your whole organization.
Can you combine staffs? A common headquarters needs only one receptionist. One janitor or cleaning service. Maybe only one - gulp - bookkeeper.
PLAN IN ADVANCE TO MAKE MERGERS WORK
Should you consider merging with another organization, there are a number of pitfalls to avoid. This is a serious matter, not to be undertaken lightly. Good intentions will be necessary to initiate the merger but insufficient to complete it.
Board involvement is essential at a very early stage. Nonprofits have no legal "owners" beside the public so the board is legally empowered in its place. But beyond legal reasons, the fastest way to scuttle an innovative combination is for operating management to get crosswise with its board. The board will test the idea's logic and should be a valuable sounding board. Their counsel - and eventual permission - is essential to making this work.
Typically, a suitably senior staff member approaches the potential merger target to explain the idea and logic. It is important that the other organization look for openness from its board, too. If the other board is reluctant, be cautious about putting too much effort into further talks, no matter how enthusiastic their staff may be. Mergers only happen if two boards agree.
Also consider what your donor base will think. While donors are generally in favor of more cooperation between Christian groups, the reputation of your proposed partner matters to them. If you were to merge only to have 25% of your donors go elsewhere, you obviously won't come out ahead. If your negotiations show sufficient promise and look likely to succeed, broach the idea to your biggest donors to gauge their reactions.
WORKING WITH LAWYERS
Lawyers never understand your two organizations as well as you do. It is, therefore, tempting for operating managers to think they can work out the details themselves and involve lawyers late in the process "just to make it legal."
This is not a good idea. While lawyers are not specialists in your business, they have a more complete understanding of the process.
They're objective. If you and your potential merger partner have avoided certain questions for fear of disrupting the "deal," your lawyers will make you answer the awkward questions: Who will be in charge? What will the entity be named? Who will be on the board?
Both organizations should have their own attorneys. While it is possible for a single attorney to work out all the details, it is usually better to have representation on both sides. Not only are two heads better than one, an attorney may have a bias towards one side or the other.
It's important to manage your lawyers, too. Some attorneys, living in a context of adversarial combat, may try to "improve" the deal for their client. That's not your goal, generally, and you need to curb his or her impulse to drive a bargain. You need your attorneys to comprehensively work through the issues and help you understand and evaluate (and negotiate) the options, write a clear agreement, and execute the plan. They will have opinions but you should remember that the principals of the respective organizations have to make the final decisions.
INVOLVE YOUR ACCOUNTANT
You may think that merging two organizations' financials would be simple, particularly if both have received "clean" opinions in their most recent fiscal years. Not true. This is more complicated than simply adding the two organizations' financial statements together.
Some issues may occur in the new combination that weren't present when each organization was separate. For example, your auditor will review the complications caused by debt financing of real estate. You may have tax complications or regulatory compliance issues caused by having operations in additional states.
One of the organizations may have financial commitments that might not be completely explained in public financial statements but that should be contemplated before merging. If one organization has issued annuities to supporters, is it fully compliant with state insurance laws? Has the board of one organization granted loans to executives or has it paid for company-owned life insurance policies (COLI) for any managers? Are there any unusual employee benefits? Are there potential liabilities that haven't been booked because they aren't technically contractual but that the organization intends to fulfill nonetheless?
Because mergers of nonprofits aren't sales of one to the other, it is tempting - but erroneous - to think that a due diligence review is not required. In order to ensure harmony after the merger, all the financial details should be revealed before the organizations finally head to the altar together.
COMBINATIONS HAVE TO MAKE SENSE
Organizations in financial distress may look to another organization for help. But it's important for the combination to make sense for your potential partner as well. The coolly objective strategic review recommended at the outset is the place to start.
Your partner must bring real strength to the merger. You must perform your own due diligence on them. If you are both weak in the same ways, then merging may look more like two drunks leaning on each other for support.
If nothing works, bankruptcy may be the only path left.
Return to Articles List >>
Email Alert
CapinCrouse LLP
If your nonprofit has been challenged by these tough economic times, you're not alone. While that's cold comfort, there are many ways financial managers can keep their organizations on track. We've helped our clients consider ways to increase their efficiency, focus on the key parts of their strategic mission and restructure their balance sheets. But sometimes nonprofits have to look to more innovative ways to survive - and perhaps even thrive.
TAKE STRATEGIC INVENTORY
Start by making a brutally frank appraisal of your organization. What are its strengths? What do you do better than many or most other organizations?
Maybe the strength of your organization lies in possessing rare knowledge or experience. Missionary organizations might have unique understanding of particular cultures or language groups. Urban missions might be gifted in working with gangs or other disenfranchised youth.
Perhaps your competitive strength lies in geography: you're the only church in a region or have the only mission-as-business operation in a country closed to evangelism.
Maybe your strength lies in a particularly talented individual or in a team of people that works well together to perform a needed task for the Kingdom. Maybe you've created a tool - a book, a seminar, a training technique - that works exceptionally well.
LEVERAGE YOUR STRENGTHS
Can you license or sell your key technology or tool? Some organizations have created seminar systems that others would be pleased to utilize, adapt or call their own. A publisher might give your organization a royalty advance in exchange for exclusive rights to use and promote your material. You may be able to negotiate the retention of usage rights for your organization, even if the tool is sold to another. (While this step involves giving your "baby" to someone else, remember that Moses' mother did that for him and it turned out okay.)
Or consider what other groups with similar theology and goals are doing in a similar or allied field. Could your groups join forces to preserve the strengths you've identified? Would another group understand and value your skills and abilities? Would they be willing to absorb your weaknesses to benefit from your strengths?
COMBINE OPERATIONS TO CUT COSTS
Linkages can take many forms, from informal agreements to full-fledged mergers. But if you're thinking about restructuring as a way to cushion the blows of financial distress, you probably aren't going to benefit from the least formal ways of working together. So agreements to distribute each other's evangelism materials, for example, aren't going to cut it.
Agreements to work together will likely involve discomfort, maybe even pain. But if you're rapidly running out of ways to keep your organization afloat, they are almost certainly preferable to bankruptcy.
To benefit financially, you must focus on ways of combining operations that make or save money.
Consider overhead costs. If another similar organization has already cut staff, they might have surplus space in their headquarters. Can two live as cheaply as one? Sometimes. Moving in with them can save occupancy costs, assuming that your own building can be sold, leased or sublet.
If your areas of operation overlap, perhaps you could combine supervision in the field. That could cut transportation costs or allow you to cut a staff member. While painful, that alternative is better than risking the solvency of your whole organization.
Can you combine staffs? A common headquarters needs only one receptionist. One janitor or cleaning service. Maybe only one - gulp - bookkeeper.
PLAN IN ADVANCE TO MAKE MERGERS WORK
Should you consider merging with another organization, there are a number of pitfalls to avoid. This is a serious matter, not to be undertaken lightly. Good intentions will be necessary to initiate the merger but insufficient to complete it.
Board involvement is essential at a very early stage. Nonprofits have no legal "owners" beside the public so the board is legally empowered in its place. But beyond legal reasons, the fastest way to scuttle an innovative combination is for operating management to get crosswise with its board. The board will test the idea's logic and should be a valuable sounding board. Their counsel - and eventual permission - is essential to making this work.
Typically, a suitably senior staff member approaches the potential merger target to explain the idea and logic. It is important that the other organization look for openness from its board, too. If the other board is reluctant, be cautious about putting too much effort into further talks, no matter how enthusiastic their staff may be. Mergers only happen if two boards agree.
Also consider what your donor base will think. While donors are generally in favor of more cooperation between Christian groups, the reputation of your proposed partner matters to them. If you were to merge only to have 25% of your donors go elsewhere, you obviously won't come out ahead. If your negotiations show sufficient promise and look likely to succeed, broach the idea to your biggest donors to gauge their reactions.
WORKING WITH LAWYERS
Lawyers never understand your two organizations as well as you do. It is, therefore, tempting for operating managers to think they can work out the details themselves and involve lawyers late in the process "just to make it legal."
This is not a good idea. While lawyers are not specialists in your business, they have a more complete understanding of the process.
They're objective. If you and your potential merger partner have avoided certain questions for fear of disrupting the "deal," your lawyers will make you answer the awkward questions: Who will be in charge? What will the entity be named? Who will be on the board?
Both organizations should have their own attorneys. While it is possible for a single attorney to work out all the details, it is usually better to have representation on both sides. Not only are two heads better than one, an attorney may have a bias towards one side or the other.
It's important to manage your lawyers, too. Some attorneys, living in a context of adversarial combat, may try to "improve" the deal for their client. That's not your goal, generally, and you need to curb his or her impulse to drive a bargain. You need your attorneys to comprehensively work through the issues and help you understand and evaluate (and negotiate) the options, write a clear agreement, and execute the plan. They will have opinions but you should remember that the principals of the respective organizations have to make the final decisions.
INVOLVE YOUR ACCOUNTANT
You may think that merging two organizations' financials would be simple, particularly if both have received "clean" opinions in their most recent fiscal years. Not true. This is more complicated than simply adding the two organizations' financial statements together.
Some issues may occur in the new combination that weren't present when each organization was separate. For example, your auditor will review the complications caused by debt financing of real estate. You may have tax complications or regulatory compliance issues caused by having operations in additional states.
One of the organizations may have financial commitments that might not be completely explained in public financial statements but that should be contemplated before merging. If one organization has issued annuities to supporters, is it fully compliant with state insurance laws? Has the board of one organization granted loans to executives or has it paid for company-owned life insurance policies (COLI) for any managers? Are there any unusual employee benefits? Are there potential liabilities that haven't been booked because they aren't technically contractual but that the organization intends to fulfill nonetheless?
Because mergers of nonprofits aren't sales of one to the other, it is tempting - but erroneous - to think that a due diligence review is not required. In order to ensure harmony after the merger, all the financial details should be revealed before the organizations finally head to the altar together.
COMBINATIONS HAVE TO MAKE SENSE
Organizations in financial distress may look to another organization for help. But it's important for the combination to make sense for your potential partner as well. The coolly objective strategic review recommended at the outset is the place to start.
Your partner must bring real strength to the merger. You must perform your own due diligence on them. If you are both weak in the same ways, then merging may look more like two drunks leaning on each other for support.
If nothing works, bankruptcy may be the only path left.
Return to Articles List >>
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