Merge or Face Insolvency. A Possible New New Norm for Non-Profits
Updated: Mar 29, 2020
We may be witnessing an extinction-level event for some of our favorite non-profits. It seems to be a reality we’re currently facing. The situation is grim, businesses are laying off employees, some furloughing for long periods of time. Others are completely closing their doors for good. Individuals are tightening up their budgets anticipating lost income for months. Creditors are allowing more leniency with the understanding that debtors are in a pinch. This is also my reality.
I’m one of the millions nationwide in this situation. This is touching the entire social good space.
The result? Would-be donors are holding onto their hard-earned cash for self-preservation leaving non-profits in a position to seek rescue. Similarly, would-be volunteers are now social distancing themselves forcing non-profits to adjust their operations significantly as they cancel their participation. This has not been without consequence.
We’re talking about an unprecedented disruption to non-profits that provide critically needed services for many communities. Those same non-profits are now fighting for their own survival. Society can’t afford to have critically needed services disappear. However, as I’m navigating these uncertain times, I’ve come across some who believe the extinction of lesser known smaller non-profits wouldn’t necessarily be a bad thing.
I suspect those who feel that way also view the possible extinction of these non-profits as an opportunity for greater sector consolidation. They may see the current situation as the catalyst for systemic change in the social good space.
So, let’s address this.
The insolvency of American’s non-profit sector.
In recent days many non-profits have adjusted their services to minimize exposure to COVID-19. To make matters worse, they’ve also been impacted by the uncertainty of funding. I’ve seen this firsthand. In recent weeks major galas, luncheons and public awareness events came to a halt. Some foundations and companies are now holding back their financial contributions. While this has affected many, there’s been a direct impact to non-profits that provide direct services (i.e. food distribution, temporary housing and other essentials) that can’t be satisfied virtually.
It should also be understood the non-profit sector employs more people than some for-profit industries. So, this disrupts more than just essential services. It’s impacting employment for non-profit professionals. To a degree, this may hurt non-profit organizations more than their for-profit counterparts. Here’s why. Non-profits often lack the cash, credit and political influence compared to for-profit businesses. Sure, they both share similarities. But, the difference has much to do with non-profits being purpose driven to satisfy a need in the community and at the same time beholden to the public.
But that’s not all. Assuming a non-profit falls on hard times they'll have greater difficulty weathering the storm. Dissimilar to their for-profit counterparts, non-profits have fewer assets to ensure a long-term period of decreased funding. Compounding on this, it’s harder to acquire large sums of capital up front to stand-up services, creating greater barriers to restarting the organization.
Given this, non-profits acting as extensions of government services must navigate this time with a fair amount of caution. I do believe it’s possible for medium and large non-profits to go belly-up during this time if they’re not careful.
That said, it’s the smaller non-profits that I worry about. I’ll tell you why.
Research from 2018 suggests that 66 percent of the non-profits in the United States have an operating budget of less than $1 million dollars. The same research indicates that 21 percent have an operating budget of between $1 million to $5 million. It’s also estimated that 30 percent of all non-profits face liquidity issues as their assets are less than their liability, and that same percentage have negative 3-year net income margins. Lastly, 50 percent (half of all non-profits) have less than a month of operating reserves and less than six months of cash.
When you do the math, it spells potential disaster as many organizations are insolvent.
But assuming large non-profits stay afloat, what does this mean for the little guy?
Some believe smaller non-profit organizations should be acquired, and those that are similar in size to others ought to merge.
The goal? To consolidate strength and reduce duplication of work.
An argument for non-profit consolidation.
I can’t think of a single person that hasn’t expressed at least a mild displeasure regarding the redundancy in the non-profit sector.
Not surprisingly, many of these same people have also been the most empathetic to communities effected by COVID-19.
One notable figure is Mark Cuban, owner of the National Basketball Association (NBA)'s Dallas Mavericks, and one of the main "shark" investors on the ABC reality television series, Shark Tank.
If you’ve followed Cuban over the years, you’d know he’s incredibly generous. Cuban has a few charitable ventures including the Mark Cuban Foundation and the Fallen Patriot Fund. But you may also recall he’s not the biggest fan of funding charity. During a 2016 interview with Reuters, Cuban said “I’m not a fan of giving to charities. I have a few I support, but the overhead and inefficiencies really bother me”. Cuban went on to say, “I pay people’s bills and help solve problems”. He mentioned that by doing so, he believes he’s able to more “readily and directly” support those who need it, rather than spending that money on “commercials and administration of all the duplication that exists across charities”.
I would have to agree to an extent.
I should be clear; this doesn’t mean Cuban isn’t supporting the COVID-19 response. Quite the opposite. In fact, he’s given a great deal, but in a different way.
In response to the NBA’s suspension of the season (and resulting work stoppage), Cuban swiftly put a plan together to financially support the American Airlines Center workers. But it didn’t stop there. He’s supporting small businesses by reimbursing employees who eat lunch at locally owned, independent restaurants. But wait, there’s more. Cuban is even joining Luka Doncic (Mavericks guard), Dwight Powell (Mavericks center) and the Dallas Mavericks Foundation to donate $500,000 toward helping healthcare workers pay for childcare during the pandemic.
I share that to say this isn’t a lack of empathy, it’s a differing philosophy on how to best support. For Cuban, he chooses to fund directly to those in need through creative means to avoid what he perceives as duplication of mission.
Cuban touches on a reality. To his credit, there’s certainly an argument for giving directly to those in need to avoid inefficiencies and redundancies found in the non-profit sector. The overlap in services can sometimes create a difficulty for supporters to determine which non-profit does the best work when they’re all competing for your attention. In an alternate universe where fewer non-profits exist (because of consolidation), maybe an environment would be created where those (like Cuban) would be more apt to donate to existing non-profits.
Perhaps the economic impact and service disruption caused by COVID-19 will be the catalyst for broaching the conversation of merging non-profits to strengthen (and untangle) the sector at large.
But is there merit for merging? Let’s find out.
Merging non-profits and consolidating resources may result in greater strength.
Non-profit mergers aren’t discussed often. Regardless, while non-profits shouldn’t merge for the sake of merging, there are certainly good reasons in doing so.
Matter of fact, a recent study from 2016 suggests that more non-profits should consider mergers to increase impact. Larger non-profits may contemplate acquiring a smaller non-profit. Alternatively, for two similarly sized (and missioned) non-profits this may mean merging to combine resources. But let’s look at a few clear reasons for consideration.
For one, with over 1.5 million non-profits in the United States there’s undoubtedly overlap in mission and services (which Cuban is critical of). A situation currently exists in the United States where multiple non-profits are serving the same populations with the same services. One must ask whether these non-profits expend energy competing for the same resources. My sense is the answer is yes. The overlap in missions and services could create a situation where both are hurting for the same streams of revenue, volunteers and in-kind products to fulfill their mission. The reality is that there are many instances of this already happening.
But the central question is this; by these non-profits merging, would that allow the combined staff to work more efficiently? There’s a chance that by doing so, a situation will be created where operations are more uniform and consistent.
Secondly, larger non-profits can take advantage of economies of scale. From a simple cost savings perspective this may (for some) be a primary reason to merge. But, beyond financials, this may increase your reach with services and product. Additionally, with a single Chief Executive Officer, accounting system and uniformed managerial process, greater efficiencies may be gained. There may even be additional influence gained politically and economically.
Another great advantage of merging includes the prospect of a greater (potentially more efficient) fundraising capability. With a larger development team, you can divide and conquer. You may be in a better position to dedicate staff to functions of major gifts, special events, individual and planned giving and donor stewardship. Sure, you’d also have to migrate your donor records to a single database (which is inconvenient). But, think of this as an opportunity to eliminate duplicate accounts, avoid redundancy and more accurate communication. Heck, you can do this with volunteers and all other supporters, creating a more accurate database of your support network.
While those are just some of the obvious advantages, I must admit non-profit mergers are not popular. I’d go as far as to say the idea carries a stigma because they’re sometimes associated with failure of leadership and financial hardship.
It’s also my sense those governing non-profits also have difficulty discussing the topic. Boards generally aren’t proactively thinking about mergers or acquisitions. I suspect for some of the reasons expressed above.
But, just as Cuban expresses his displeasure in the duplication of services and associated costs of inefficiencies, perhaps there’s reason to consider mergers. Beyond reducing overlap, larger (more sufficiently funded) non-profits will have a greater ability to weather turbulent times. I also want to be very clear; I don’t wish for any non-profit to be dissolved as a result of the financial strain from COVID-19.
That said, I do wonder whether this is perhaps the time to have the conversation about non-profit mergers and whether that’s the best course of action for select non-profits.
This uncertain time (for some) will be viewed as the catalyst (and opportunity) for change. I also know that others will see this as the reason to double-down on the status quo.
But what do you think? Do you view mergers as an opportunity for non-profits to gain strength? Or, do you see the act of consolidation as a terrible idea? Do you have any recent examples of non-profit services that when combined created a better outcome for the community?
Or maybe you’re a funder that would be more willing to fund non-profits that consolidated efforts.
Regardless of where you stand, I’d love to get your take. Please reach out and tell me what you think. In the meantime, stay Responsible AF!