Financial Costs of Mergers
Guest Blog by Erica McGeachy Crenshaw, CEO of Execute Now! and Associate Member of Maryland Nonprofits
Read the original blog here.
“The benefits of mergers are what motivate organizations to consider this option, but the costs are not always clear at the outset,” explains Thomas McLaughlin, director of consulting services for the Nonprofit Finance Fund.
Small hospitals look at mergers
Credit-rating agency,Standard and Poor’s, recently reported that stand-alone hospitals, in particular, are at a tipping point and increasingly looking at mergers as solutions to their financial woes. Why? Greater pressure from physician departures, rising bad debt, higher employee benefit costs, weak operating margins and lower patient volumes are among the reasons. Consequently, these smaller hospitals “are generally more vulnerable to competition in their local markets, regional economic swings and demographic shifts,” reports Robin Respaut of Reuters.
Unfortunately, nonprofit hospitals aren’t alone in the financial struggle to overcome internal nuances that make organizations susceptible to external economic factors. That’s why mergers and alliances have become a popular alternative to consider for many stumbling nonprofits.
Three areas where you can scrutinize potential costs
McLaughlin cautions you to thoroughly evaluate the weighty task of mergers. Fortunately, unlike the corporate world, nonprofits can openly examine the pros and cons without the legal risks of leaking publicly-held company information.
He recommends analyzing the true costs of a nonprofit merger in three phases:
Cost considerations in Phase One, Two and Three
In McLaughlin’s article, “The Cost of a Merger,” he explains anticipated expenses and typical areas of change in each of the three stages.
In Phase One, leaders learn as much as they can about the other organization-especially quantifiable considerations. Costs associated with this phase come from facilitation and research. Nonprofits that attempt to do this in-house or on their own risk spotty results. Outside help is advisable.
Costs during Phase Two are greater but manageable. This phase is still greatly dependent on staff and board time. At this point, consultants who facilitate and support the process are the largest expenditure.
Phase Three, or integration, represents the biggest expense area. You will find expenses and revenue dramatically change during this time.
McLaughlin identifies the most typical areas of the greatest financial change:
-Common grants and federal funding (funders can unknowingly undercut mergers by combining two grants into one smaller one)
-Government contracts (newly merged organizations may have to re-bid)
-Employee compensation (mergers can prompt turnover in management)
-Employee benefits (mergers can combine two benefit levels)
-Occupancy costs (mergers generally reduce space and sell off surplus)
-Information technology (opportunities exist to reduce costs here)
-Contractual services (mergers present the chance to re-examine and/or reduce contracts).
The finance professionals at Execute Now! advise clients to enlist expertise in forecasting thorough and expertly produced financial scenarios for potential mergers. Use the board and staff collectively to weigh in on all the monetary nuances. Make a commitment to understand every budget line and financial aspect of your own organization and your potential partner. Discuss with your partner how each of you envisions blending costs and efficiencies. Most importantly, consider worst and best case scenarios for integration.
As many reports and articles on this merger topic indicate, nonprofit alliances don’t generally produce immediate savings. Mergers generally cost more in the beginning but promise greater savings in the long run. Mergers are not for the faint of heart-though nonprofits willing to make the leap have far greater potential than they do alone.
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