How Mergers & Acquisitions in the Not-for-profit Sector can Unlock Value

Last updated 17 May

Why NFPs should consider restructuring

There are several important reasons why NFPs should consider restructuring. They include some of the following. 

Firstly, some risks are becoming increasingly difficult for charity boards to successfully manage alone. The risks of operating overseas are becoming unrealistic to manage. This is especially the case for small charities formed in resettled religious, cultural and language-based communities or in a particular community’s country of origin 

Secondly, there is a massive undertaking involved in distributing resources directly to overseas beneficiaries. Even working with trusted overseas partners in high risk countries can create a constant compliance headache under ACNC’s External Conduct Standards.

Furthermore, in other communities, there may be charity service distribution overlaps when different charities offer very similar relief services to meet very similar needs.

Finally, the needs being addressed appear to be more a function of a shortage of community development skills at the local level. The genuine will to raise funds and do productive community work is not always an effective substitute for well-designed and targeted programs to help with significant social and economic disadvantage.

These problems can compound to work against sustainable economic and social development of people in genuine need. Meeting these challenges requires leadership and re-thinking for small community-based charities.

Benefits of merging and acquisition

Merging your charity with one, two or more like-minded organisations can prove beneficial for your charity and the beneficiaries involved. The benefits of restructuring your charity through a merger or acquisition include:

1. Reduces administration expenses through economies of scale, economies of scope and synergies;
2. Reduces competition – as most charities compete with almost-identical charities for the same donor dollar.

Merging can occur when:

1. two organisations combine, one transfers all its assets to the other and then winds up, or;
2. both organisations combine to form a brand-new organisation, and then both of the old organisations wind up.

Meanwhile, an acquisition occurs whereby one organisation (A) takes over the assets, contracts and employment obligations of the other organisation (B), after which organisation B then winds up and ceases to exist.

How administration expenses are reduced through merging

In the charities sector, co-ordination between organisations can make a massive difference to your charity’s social impact. Charities coming together are able to discuss and share their own knowledge and skills which allows for the ability to offer more services or service a larger area. 

For example, merging with a larger organisation can have benefits, as the larger organisation will likely already have access to tax and other concessions, deductible gift recipient endorsement and other benefits.

What is meant by synergies?

This is when the interaction or cooperation of two or more organisations produces a combined effect greater than the sum of their separate effects. 

Charity A may be able to reach 100 beneficiaries on its own and Charity B may be able to reach 50 beneficiaries on its own; however, working together and pooling their resources may mean that they could benefit 250 beneficiaries.

What is meant by economies of scale?

This is the potential for more units of a good or service to be produced on a larger scale, yet with lower costs per unit (on average).

What does this mean for the charity sector? Below is an example which provides some perspective:

1. Your organisation is preparing food packs for distribution in Uganda.
2. You are currently producing 1000 food packs, and it costs you $15 per pack based on current supply and logistics arrangements.
3. By pooling your resources (and specifically, finances) with another organisation, you may be able to:
   • Renegotiate your supply prices with providers based on your ability to acquire more products. 
     • E.g., where a rice supplier might have wanted $8 per bag of rice for 1,000 bags, they may be prepared to accept $5 per bag on the basis that you are acquiring 5,000 bags.
   • Combine logistic efforts at a larger scale. 
     • Instead of engaging a third party to ship food packs on a per delivery basis, with a larger scale – you may be able to directly acquire shipping containers/transport vehicles, allowing for overall lower logistics costs

What is meant by economies of scope?

This is the potential for a proportionate saving gained by producing two or more distinct products/services – when the cost of doing so is less than that of producing each separately. 

In the charity context, an illustrative example arises as follows:

1. Charity A assists children with disabilities in Melbourne.
2. Charity B assists children with disabilities in Sydney.
3. Charity A spends $10,000 per annum on marketing/advertising its products in Melbourne.
4. Charity B spends $8,000 per annum on marketing/advertising its products in Sydney.
5. If Charity A and Charity B were to merge, there is the potential to reduce marketing/advertising costs (among other costs) for providing services in both Melbourne and Sydney as there will be similarities in marketing strategies, product branding, and product design costs which will be spread over two services areas.
6. Once merged, economies of scale could result in the overall marketing spend being less than $18,000.

Alternatives to mergers and acquisitions

Whilst the above benefits could arise from a merger or acquisition, there are other options that charities can explore which include:

1. A memorandum of understanding or a formal agreement to share resources such as premises, assets or staff;
2. A joint venture or co-sponsoring events or programs; or
3. Setting up a separate legal entity to undertake a joint project, or to manage a shared asset.

At Birchgrove Legal, our experienced NFP Team can assist parties with structuring their merger or partnership and drafting any necessary contracts, agreements or other documents along the way. It is essential to seek professional and tailored advice on any intended transactions of this nature.