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Mergers

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A guide to the different reasons for merging and types of organisation merger.

What is a merger?

Merger is where two or more organisations formally combine in a transaction to form one organisation. The term merger is frequently used as a euphemism for takeover because in every real world combination of two not for profit organisations one of the pre-takeover organisations will always have a more powerful position in the resultant organisation than the other. Merger is used is as a substitute for takeover as it avoids the offensive suggestion that the least powerful organisation is going to lose out in the transaction.

The term merger has no precise legal definition and is used to cover a number of different processes since legally 50/50 governance is impossible and a conflict breaking clause must always be in place.

A variation on merger occurs where a parent organisation governs a group of subsidiaries in a group structure - one organisation may become a holding company for another organisations. Group structures combine some of the elements of merger, but the subsidiaries can retain substantial independence.

Why voluntary and community organisations merge

The decision to merge should be driven by consideration of whether merging will improve outcomes for beneficiaries by helping an organisation better fulfil its aims. There is a growing interest in merger among voluntary and community organisations in response to a combination of internal and external factors. The greatest disappointments with mergers occur when both pre-transaction organisations believe that they will both be able to continue with their existing processes. This never occurs as one organisation is in practise taking over the other; this is not to imply that the outcomes for the beneficiaries of the least powerful organisation will not benefit greatly from the merger. Often a small organisation taken over by a large organisation gains significantly in the transaction; but it takes a lot of courage for a non profit to go down this route.

Internal drivers include:

  • the desire to provide more or better services to beneficiaries
  • the need to increase efficiency through better use of resources
  • preventing duplication of services
  • financial difficulties
  • raising public profile or boosting income
  • loss of key staff or trustees such as a chief executive or founder trustee
  • 'survival' and 'rescue' - an organisation in jeopardy merges with another with similar objectives so that its services continue 

External drivers include:

  • pressure from funders to reduce duplication
  • government encouragement
  • competition with similar organisations
  • stakeholder opinion
  • public perception of an overcrowded voluntary sector
  • changing needs of end users 

Types of merger

Mergers can take a variety of forms. The most common types are:

Full merger

  • Both / all organisations transfer their staff, assets and activities to a new organisation with similar objectives and then the original organisations wind up.
  • Organisation A continues, perhaps with some adaptations of its name and structure. Organisation B (and C etc) transfers its staff, assets and activities to Organisation A and then winds up. 

In both of these types of merger it is essential before the merger is agreed that the parties agree which of their staff, assets, business processes and activities will be adopted after the merger. Many merging organisations are tempted to set in train a 'best of' post-merger process to select which staff, assets, business processes and actvities will be extant or even attempt to design new practices. Giving in to these temptations is a management opt out and always fails. Best practice in corporate mergers has shown that a rapid period of post-merger adjustment to the directed staff, assets, business processes and activities is always needed and is the most significant success factor in a merger.

Group structure

In a group structure, a parent organisation governs a group of subsidiary organisations which retain their own legal identities.

One example of a group structure is where Organisation A becomes a holding company for Organisation B. This structure can be used to maintain the services Organisation B provides while protecting Organisation A from any associated risks arising from Organisation B by creating a 'firewall' between the organisations. There may be some transfer of senior staff, assets or projects, but Organisation B continues to operate as a separate legal body, albeit one controlled by the trustees of Organisation A. The relationship may continue indefinitely or may be an interim stage prior to full merger.

Governance and Trustees

A merger gives the rare opportunity to simultaneously review the governance arrangements of both/all organisations involved. There is often the tendency to adopt the Mem and Arts (memorandum and articles) of the biggest/richest organsisation, but starting with a new method (such as forming a new Community Interest Company, or a CIO whenever they are coming!) will bring longer term benefits. It can also be used to address any 'legacy' issues with the organisations involved.

Trustee Shake-Up

This is also an ideal time to review the trustee board. Ideally, the chairs' of the existing boards should agree to appoint an interim chair of the new organisation, who is not already involved in any of the existing organisations (we all know how well that will go down with them!). Once the new organisation is up and running, trustees should be selected/re-apply based on the desired make-up of the board for the new (and not the old!) organisations.

NB: This may be a political minefield (especially if you have 'Founder Syndrome' involved), but it may be possible to get some of the key stakeholders/funders to insist on this as part of the merger.

Stages of the merger process

Page last edited May 22, 2018

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