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How (and when) do I dissolve my nonprofit, or merge it with another?

September 21, 2020 Category: FeaturedLongMethod


9/21/20 @ 9:50am EST: A clarification was made between the types of grants made by the Repositioning Fund.
A nonprofit is the work of mission. What happens when you think that work goes beyond your organizational boundaries?

It’s long been a kind of conventional wisdom among some analysts that there are too many redundant nonprofits. Others are a bit more precise, arguing there aren’t enough good nonprofits. This argument was made even more focused in an influential 2018 analysis of 300,000 of the country’s 1.5 million nonprofits. Those researchers say that whether there really are too many nonprofits varies widely by county and by mission. That is, in some U.S. counties, and for certain populations, there absolutely are too many nonprofits, less true in other places.

Those researches came to an elegant rule of thumb: a community’s nonprofit sector health improved as more nonprofits are established, up to a point — once there were three nonprofits per 1,000 residents or more, financial health declined. That’s the saturation point, they say: three nonprofits per 1,000 residents. At that point, redundancies proliferate, fundraising is strained and impact declines.

No matter how you slice it, Philadelphia is at or near the upper-limits of what a healthy nonprofit sector might look like.

There are more than 15,000 nonprofits in Philadelphia’s five-country region, which has a population of 4.13 million. That would put the region at 3.6 nonprofits per 1,000 person — though there’s a wide range in how active many of those are. The question of what you count as “active,” is a major one. Using the standards of that 2018 analysis, no county in the region had more than 1.5 nonprofits per 1,000 residents — Philadelphia County had just 1.3. For contrast, a different analysis from 2000, reported there were 4,211 active nonprofits in Philadelphia city (almost half of them faith-based), or nearly 2.8 nonprofits per 1,000 residents at that time.

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But the 2018 analysis made an important caveat: a county could be home to a disproportionate number of larger nonprofits that sap the effectiveness and financial health of smaller, more niche or community-based efforts. That might sound familiar.

The point is no matter how you slice it, Philadelphia is at or near the upper-limits of what a healthy nonprofit sector might look like. The causes of redundant nonprofits are many: donor influence, cultural assumptions and the inconsistent deployment of tools like mergers, acquisitions and dissolution that are far more familiar in the private sector.

What can be done about it?

One of the country’s most-watched approaches is the Greater Philadelphia Nonprofit Repositioning Fund, charged with the effectiveness and financial health of the sector. Though they approach their work in a variety of ways, they may be best known for their grantmaking focused on due diligence around potential nonprofit mergers.

Nadya Shmavonian leads a panel at November's Sparking Solutions Conference.

Nadya Shmavonian. (Archive photo)

Since the first grant was made in late 2015, the Nonprofit Repositioning Fund has made 17 “merger/acquisition” grants, totaling $589,100, said the group’s director Nadya Shmavonian, who is an influential voice on the topic and partner at SeaChange Capital Partners.

“More than double that amount received exploratory grants, with approximately half not advancing to a formal transaction.”she said. “It might be just as or even more important when a nonprofit decides not to continue with a merger.”

“The technical assistance support we provide nonprofit grantees to conduct the essential due diligence of whether to move forward or not provides a valuable and safe space in which to rigorously kick the tires, and in some instances dodge the bullet of embarking on a potentially flawed partnership,” she wrote in a followup email.

One grant that Shmavonian administered last year did help a deal move forward.

Patricia Wilson Aden. (Courtesy)

On Aug. 3, The Court of Common Pleas of Philadelphia County approved Art Sanctuary’s petition to transfer its assets to the African American Museum, said Patricia Wilson Aden, the  outgoing President and CEO of the African American Museum of Philadelphia.

“The two organizations are now working on the actual transfer of the assets,” said Aden, “which is required before Art Sanctuary can formally dissolve as an organization.” There were no Art Sanctuary employees at the time of the alignment — in part because former Executive Director Valerie Gay took a role at the Barnes Foundation last year. The two organizations began conversations in 2016.

Aden, in particular, cautioned me against using the words “merger” or “acquisition” because of the “different legal connotation.” Though clinical sounding, she prefers the technically correct “asset transfer,” or  becoming “legally-aligned.”

Valerie Gay. (Courtesy)

Whatever you call it, that legal framework is seen as a meaningful case study in what is an altogether rare phenomenon: two nonprofits with aligned work pooling resources to reduce redundancy and improve effectiveness. That’s something especially important among the “grossly undercapitalized” nonprofits with a focus on Black and brown residents, notes Gay.(Art Sanctuary has a special focus on Black art.)

It made for an ideal conversation to have to better understand this topic of nonprofit dissolution, merging or, you know “legally-aligning.” So I gathered Shmavonian, Gay and Aden for a group interview.

The conversation:

The takeaways:

  • How do I dissolve my nonprofit, or merge it with another? Contact an attorney. This is not legal advice, but rather a starting point.
  • When is a merger or acquisition best? Three categories to “extend mission:” a planned transition of an organization leader; a regulatory change benefiting scale or when facing the loss of a major funder, or income stream. For Art Sanctuary, Gay was thinking about moving on.
  • Who should be considering this for a nonprofit? “This should be a routine strategic conversation, especially at the board level,” said Shmavonian. If your executive director and board haven’t had this conversation about how logistically to best deliver on mission, it’s likely a gap needing to be addressed.
  • Who should be involved in due diligence? The Executive Director and one or two board members. Logistically, depending on size, some operations staff may need to be involved but given how exploratory conversation go, it’s best to keep “the circle small,” as Gay said.
  • When is dissolution best? When your primary assets or intellectual property is redundant to a peer organization, especially if there no or limited staff or person impact. There are other legal reasons.
  • When should you consider this? “The moment it comes to mind, please explore it,” said Gay. “Don’t wait until you get your back against the wall.”
  • When will it work? “When the sum really is greater than the parts,” said Gay.
  • How long did it take? The process took them four years, including early work before the Repositioning Fund grant, though Aden notes a dedicated project manager likely would have spend their effort.
  • How to find a partner for a merger or acquisition? It likely should be between organizations that already close. As Gay put it: “you need someone willing to initiate and someone willing to engage.”
  • What are the biggest challenges? Maintaining mission and income, while exploring opportunities. “It did present funding challenges, because the exploration kept going another six months, “said Gay. As Aden put it: “The rubber band kept stretching.” So they worked out a management agreement while doing due diligence, and the Repositioning Fund grant was important. Get a dedicated project manager for the deal, Aden advised. “People believe it can happen more quickly than it does,” said Shmavonian. “Consider the time you are estimating to get it done by and multiply it.”
  • What are the ethical considerations? Both for pursuing funding and hiring and working with staff come to mind. Gay was upfront with large funders as they were exploring. At the end of the day, an executive director has to weight when something is purely exploratory, and when a deal looks imminent.
  • ‘Don’t fall in love with love’ as Shmavonian puts it.”Find the reasons why you shouldn’t go forward.”

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