A topic on many nonprofit executive and board members’ minds in recent years is mergers. The decision to strategically consolidate operations with another organization’s and become one organization can be advantageous.
Is this a strategy your organization might consider? What are the pros and cons?
To take a closer look, I interviewed Kevin Fee who represents human services organizations in mergers and acquisitions. Here’s an inside scoop that may spark questions and ideas for your consideration.
From your work as a broker representing healthcare and behavioral health organization buyers in mergers and acquisitions, what is the most important condition that says an organization is ready to engage in this type of growth?
Growth strategies are properly the product of a strategic planning process that includes clearly defined objectives and time frames, along with detailed, board-approved acquisition criteria (when the growth plan contemplates inorganic business development). Pro forma financial forecasts including both income statements and balance sheets through the planning horizon provide confirmation that sufficient capital is available for plan execution. When these pieces are in place, management is positioned for success.
What makes an organization attractive for acquisition or as a partner for merger?
Different suitors will place different values on targets based upon the needs that they hope to address. These needs may be expanded scale or scope, acquiring management talent, access to superior technologies or other considerations.
What are a couple red flags you look for that would cause you to rule out an organization under consideration for your client?
Angler West represents buyers typically in the very fragmented human services industry. Under these circumstances, it’s likely that the biggest avoidable risk for clients is wasting time by focusing on potential transactions that cannot be closed because the seller lacks execution capability. Brokers can play a central role in preventing their clients from wasting their most valuable resource in a consolidating marketplace: time.
What are the advantages of M&A for growth strategies? Disadvantages?
Both for-profit and nonprofits can grow more rapidly via M&A than through organic growth. Additionally, because nonprofit business combinations typically result in a combination of the balance sheets of the two transaction participants, nonprofit business combinations are instantaneously accretive in every instance except those in which one of the participants has negative net assets.
The disadvantage of M&A involving a for-profit is that the forecasted cash flows may not be achieved, and therefore, the expected return on invested capital may fail to fulfill expectations within the timeframes forecasted.
The disadvantage of M&A involving two nonprofits is that the integration of corporations is challenging, stressful and sometimes expensive and disruptive – to the degree that these adverse consequences outweigh the often significant economic benefits.
Kevin Fee is the President of Angler West Consultants, Inc., an advisory firm focused exclusively on mergers and acquisitions of human services organizations. Clients of the firm have included public, private and nonprofit corporations. Founded in 1996, Angler West has been involved in more transactions involving human services organizations than any other intermediary over the past two decades.