Mergers and Acquisitions (M&A)

as a Tool for Scaling Social Enterprise

Summer 2010
 Investing in Employment and Hope

Agenda

Introduction and research process

Summary of findings

Appendix
 Investing in Employment and Hope

This study focuses on answering three key questions

about M&A as a tool to scale social enterprise

M&A Strategy Through Three Lenses

Growing social
enterprises “How good is M&A at delivering
Purpose the social and financial outcomes
M&A for social enterprises?”

M&A for
scaling “What are the characteristics of
social those that engage most often in
enterprise Prevalence M&A, within the industries and
size of business that social
enterprises operate in?”

“What knowledge, capabilities and

Process systems would organizations need to
develop to engage in social
enterprise M&A?”

Note: For the purposes of this study, scaling is defined as “the expansion of sustainable financial and social outcomes”
3
 Investing in Employment and Hope

Roadmap for understanding social enterprise M&A

Studied social enterprise through non-profit and small business lenses

Non-profit topics covered Small business topics covered

• Partnership continuum • Value creation outcomes

• Relationship between partnership • Characteristics of value-creating
structure and purpose Purpose deals and deal-makers
• Outcomes of mergers versus joint • Employment outcomes
programming

• Frequency of non-profit deals • Frequency of deals in social

• Barriers to more activity enterprise industries
• Active sectors and reasons to use Prevalence • Characteristics of acquirers,
M&A over organic growth targets, and deals in these
industries

• Process map • Process map

• Due diligence checklists • Documents/decisions needed
• Costs of merging Process • Legal structure trade-offs and
• Lessons learned considerations
• Valuation technique

Social enterprise

4
 Investing in Employment and Hope
Variety of resources used to understand the full
spectrum of issues related to M&A
Key
Primary source Incubation
(interview)
Secondary source
(reports, databases)
Social
enterprise TROSA
Alameda County SBDC
Harvard Business School
Community Partners
Non-profit
Foundation Center Non-Profit
Collaboration Database
Literature search:
Bridgespan, FSG, La Piana,
HBR, SSIR, CASE
For-profit and Haleblian et al. 2009
small Journal of Management
business
U.S. SBA 1998
“M&A in the U.S.”
Literature search: Harvard
Business Review, McKinsey
Quarterly, Bain, BCG
Exploration Negotiation Integration
Due Legal
Sourcing Valuation
diligence structure
Rubicon Programs
Literature search: Bridgespan, La Piana,
Harvard Business Review, Stanford Social
Kelly “Law and Choice of Entity on the Social
Innovation Review, Aspen Institute, CASE
Foundation Center Non-Profit
Collaboration Database
La Piana Consulting
Davis 2002, “Making of
Perlman and Perlman
Enterprise Frontier”
Nonprofit Merger”
Bridgespan
MergeMinnesota MAP
KrasnePlows Austin and Leonard ,“Can the
virtuous mouse and the
Global Investment Partners wealthy elephant live happily
ever after?”
Small Business Advisor
Literature search: Harvard
Business Review, McKinsey
SCORE Small Business Counselor Quarterly, Bain, BCG
Thomson
ONE
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 Investing in Employment and Hope

Agenda

Introduction and research process

Summary of findings

Appendix
 Investing in Employment and Hope
Summary of findings: Purpose of M&A
Strategic M&A is rare in non-profits and value-creating M&A is rare in for-profits
Non-profit and social enterprise findings
“No strategic M&A”
Nonprofits use a wide spectrum of partnership
structures
• Relative to other structures, mergers are more
program-driven and require greater integration
between two organizations
• Mergers require changes in corporate control and
the creation or dissolution of at least one
organization
Mergers are better at achieving breadth, through
greater reach and range, and joint programming or
joint venture efforts are better at achieving depth,
through improved program outcomes and quality
• Mergers are better for geographic expansion
• Joint programming is better at reducing overcapacity
in a market and innovating to serve new markets
Despite these differences, nonprofits do not use
mergers differentially to achieve these outcomes
• Organizations do not change the partnership
structure they use to fit the strategic purpose of their
partnership
Small business and for-profit findings
“Winners and losers in M&A”
In general, it is hard to create value through M&A
• The median shareholder return two years after a
transaction 13% less than a no-deal peer index
• Using M&A to reduce overcapacity and achieve
back-office efficiency does not create value
However, there are definitely patterns of success
• Those who use M&A to acquire R&D, expand
geographic presence, and discipline ineffective
managers create value
• Frequent deal-makers, smaller size deals, and
deals made throughout economic cycles also
create value
In general, it is hard to create jobs through M&A
• The average merged establishment employs 4%
fewer people over a 4-year period relative to a
control group
However, job creation is more likely to occur in service
industry mergers and in micro-enterprise (<20
employees) mergers
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 Investing in Employment and Hope

Summary of findings: Prevalence of M&A

Prevalence depends heavily on industry in both non-profits and for-profits

Non-profit and social enterprise findings
“Some are more likely to than others”
Non-profits merge at about the same rate as for-profits
• This rate is driven by M&A activity of smaller non-
profits
• Large non-profits are much less likely to merge than
their for-profit peers
Despite this prevalence of activity, experts identify
negative perception of M&A and shortage of
intermediaries as barriers
Advocacy and human service organizations are
disproportionately likely to pursue mergers because of
barriers to organic growth
• High degree of competitive pressure from
government funding sources
• Importance of local brand and market saturation
make growth into new markets difficult without
acquisition
Small business and for-profit findings
“Social enterprises are unique”
Industries within REDF’s current and past portfolio
(“REDF‟s target industries”) are less likely to merge
than other small businesses, but when they do it is
more likely to be motivated by ambitions of scale
These industries disproportionately favor acquiring
assets over mergers compared with other industries
These industries are size agnostic, but most fall in
the $1-$5M revenue range
These industries are more likely to do transactions for
geographic roll-up purposes

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 Investing in Employment and Hope

Summary of findings: Process of M&A

Similar across non-profits, small businesses, and non-merger transactions
1
Incubation Exploration Negotiation Integration
(Time varies) (1-2 months) (2-4 months) (Time varies)
• Assess risk 2 Pass resolution to negotiate Approve or reject
appetite • Timeline recommendations
Boards • Source • Commitment of resources (e.g.
partners identify the negotiating team)
• Negotiation objective

• Assess Negotiation Research 4a 5 6 Integration Integration

Research Recommend
capabilities logistics agenda planning implementation
Negotiation • Identify key • Meeting times • Long list of • Create options • Negotiate specific • Set merging date • Track progress
team resources • Create budget questions to be • Assess gives and gets • Identify core on checklist
(management • Source • Communication answered cost/benefits of • Draft terms of the integration team • Track outcomes
and key staff) partners plan & statements • Concerns, fears, options deal • Develop 30-60-90 relative to plan
• Define • Specify resources contingencies • Identify risk and • Develop pro- day plan and adjust if
success needed identified mitigation plan forma budget needed

Facilitate process Due diligence Facilitate process

Key
Consultants Help gather Stakeholder Document Review historical • Run trainings and team-
Go/no-go
info, give 3rd engagement, agreement, keep & projected building programs
decision
party advice coordination track of open items financials • Support integration team
# Deep dive on 4b Research Legal
process included Due diligence
implementation
in appendix
Lawyers Understand legal Review tax File documents
entity & execution documents and notify govt.
process for merger potential liabilities bodies
3 • Identify Provide funding for costs of merging Provide financing options for asset Provide funding for costs of
opportunities (e.g. consultants and lawyer fees) acquisition integrating (e.g. team-building, hiring
Funders • Introduce new staff, merging systems)
potential
partners

Source: John Davis. “The Making of a Nonprofit Merger”; KrasnePlows “Mergers, Collaborations, & Strategic Alliances to Sustain Programs”, Expert interviews 9
Appendix A: Purpose of M&A
 Investing in Employment and Hope Non-profit

Mergers are better at going wide and joint programming

is better at going deep
Mergers primarily accomplish
Outcomes reported by improving breadth, either JPs primarily
organizations undergoing through a greater range of accomplish improved
mergers or joint programming offerings or a greater reach into depth, either by
the community improving program
80% outcomes or by
Neither are very JPs are slightly
70% good at financial better for reducing improving the quality of
efficiency overcapacity service provided
60%
Mergers are better
50% JPs are also better for
for geographic
innovations and
expansion
40% serving new markets
71%
30% 59%
48%
20% 42%
29% 33% 26%
10% 5%
8% 14% 2%
0% 7%
Financial efficiency Geographic Reduced Innovation and new Improved breadth Improved depth
(reduced cost per expansion overcapacity markets (1) (reach and range) (quality and
unit) outcomes)
Mergers Joint programming

1. Estimated using the response “Able to serve greater geographic area”; 2. Estimated using “Greater coordination of service (less overlap, duplication, fragmentation”; 3. Estimated using
“previously unmet community need now being addressed”; 4. Estimated using “Greater range and variety of services/programs offered” and “Increase in number of
clients/individuals/organizations served”; 5. Estimated using “Improved quality of programs/services” and “Improved programmatic outcomes”
Source: Foundation Center Nonprofit Collaboration Database; REDF analysis
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 Investing in Employment and Hope Small Business

Acquiring complementary abilities and disciplining

ineffective managers are good reasons for M&A
Value creation Value creation
investment thesis outcome Explanation Source

Reduce overcapacity– having No value created for multiproduct Eckbo 1983;

fewer firms increases pricing firms, but some support from Stillman 1983;
power and appropriates value transportation sector Prager 2002; Kim &
from customers Singal 1993

Back office efficiency - sharing Some efficiency gains confirmed McGucki & Nguyen
resources to gain administrative for pre-1970 but not for post-1970. 1995; Klein 2001
economies of scale Transaction costs wipe out
many of the gains.

R&D substitute or geographic Abnormal returns associated Capron et al 1998;

expansion – seek targets with when acquirer and target firm Karim & Mitchell
capabilities different than the resource complementarity is 2002; Purnam &
acquirer high. Positive results for firms Srikanth 2007
using acquisition as a means of
innovation.

Market discipline – provide a CEOs of acquired firms are more Agrawal & Walkling
check on ineffective managers likely to be overcompensated 1994
and more likely to be dismissed
after an acquisition

Key No evidence to Strong evidence to

support value creation support value creation

Source: Haleblian et al,.“Taking Stock of What We Know About Mergers and Acquisitions: A Review and Research Agenda.” Journal of Management; 2009 35: 469.
12
 Investing in Employment and Hope Small Business

Frequent deal makers do well by developing strong

institutions and focusing on easy to execute deals
Frequent acquirers have strong Geographic roll-up deals create value by
institutions to help them create success being easier to execute
Frequent acquirers make acquisitions Geographic roll-up deals tend to be easier to
consistently throughout the economic cycle extract value from than other types of deals
• Within frequent acquirers, constant buyers (e.g. overcapacity driven or R&D driven)
outperform recession or growth buyers by • Target tends to remain in tact, with local
1.7-2.3X(1) leadership continuing
• Value can be extracted even if integration
Frequent acquirers institutionalized speed is slow and the two entities remain
processes and feedback systems to ensure separate
they learn from their mistakes
• Start with small deals and generate a Value is created from acquirer bringing its
system to learn from the small deals processes to the target to lower operating
• Have a standing team for deal making costs
• Hold on to key employees and customers
Frequent acquirers know when to walk away rather than realize efficiencies quickly
from deals • Bringing new processes may require new
• Interested parties may have powerful culture, but don‟t try to switch overnight
incentives to push a deal through − Build in training costs, new
• Good acquirers tie rewards to long-term performance measures, and different
success of the acquired business rather incentive compensations for the
than completion of deal process change
1. Bain 2003 study of 724 U.S. companies with revenues >$500M making 7,475 acquisitions. Constant buyers had an excess return indexed to the average of 1.74 compared with recession
buyers at 1.06 and growth buyers at 0.75
Source: Joseph Bower “Not all M&As are Alike – and That Matters” Harvard Business Review (March 2001) 13
 Investing in Employment and Hope Small Business

Definitions and strategic objectives for M&A

Product or
Reasons to do Geographic roll- market Reduce Substitute for Industry
M&A up extension Overcapacity R&D convergence

Example Banc One buys Quaker Oats Daimler-Benz Cisco acquire 62 Viacom buys
scores of local buys Snapple acquires Chrysler companies Paramount and
banks in the 1980s Blockbuster

Strategic objectives Buy a local Extend a Eliminate excess Use acquisition Building a set of
operating unit as a company‟s capacity in an in-lieu of in- resources to enter
beach-head for product line or industry, gain market house R&D to a new industry
expanding market share, and generage quickly build a
geographically coverage cost savings market position

Characteristics of • Keep acquired • Culture and • Rationalize quickly • Evaluation and • Give acquired
success operating unit governance • Similar size due diligence is company wide
separate handled with acquisitions will take everything berth
• Slow integration care a long time and be • Put first-rate • Piece-meal
• Use carrots not • Bigger difficult executives in integration of
sticks to acquirers • Tend to be the least charge of only certain parts
introduce new relative to successful in terms integration and of acquired
values target do of value creation make it high- company is ok
better visibility
• Frequent • Hold on to
acquirers do talent if you
better can

Source: Joseph Bower “Not all M&As are Alike – and That Matters” Harvard Business Review (March 2001) 14
Appendix B: Prevalence of M&A
 Investing in Employment and Hope Social enterprise

M&A activity related to scaling social enterprises is rare

Of the 245 collaborations listed on the Foundation Center‟s Nonprofit Collaboration

Database, only one details a social enterprise(1) collaboration
 Collaboration involved a joint-venture between two non-profits to create a
social enterprise

Of the129 case studies in CASE‟s database on scaling social impact,(2) none cover
both social enterprise and M&A
 Most popular joint topic with social enterprise was geographic expansion via
non-acquisition routes (e.g. technical assistance, affiliation, partnerships)

Of the 12 experts interviewed for this study, none could think of a social enterprise
using M&A as a growth strategy
 Among those that were familiar with M&A transactions in the social enterprise
space, poor financial performance was the driver of all activity
1. Determined by using social enterprise search terms such as “social enterprise”, “revenue generation” and “social venture” on the text of the letters of nomination of all collaborations listed in
the database and user judgment reading the returns on the search query to ensure the transaction involved collaboration between two revenue-generating social enterprises The identified
social enterprise collaboration was a collaboration between Information Technology Exchange and Skills, Inc. to develop a joint business venture for electronic waste recycling; 2. From the
Duke School of Management‟s Center for Advancement of Social Entrepreneurship‟s searchable case study database on scaling social impact. Used keyword classification to determine joint
coverage of social enterprise and mergers;
Source: Foundation Center Nonprofit Collaboration Database; REDF analysis
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 Investing in Employment and Hope Non-profit

Rate of non-profit M&A activity is on par with for-profits

but barriers remain for larger non-profit organizations
Rates of activity similar overall, but For larger non-profits,
large non-profits less likely to merge several barriers remain

% of organizations undergoing merger(1) Perception issues

2.0% • Acquisitions typically seen as a positive
But when broken down outcome for businesses, but often reflect
by size, large non- negative performance for non-profits
profits (annual budgets • This stigma makes it difficult to talk about
1.5% >$50M) are one-tenth
as likely to do M&A as
opportunities openly
their large for-profit
1.0% counterparts Shortage of intermediaries
1.7% • Investment bankers frequently identify good
1.5% targets for for-profit acquirers, but there are
0.5% not experts to “recommend” good deals in
the non-profit space
• Lack of lawyers and existing case examples
0.0% to help structure creative deals that can
For-profit Non-profit accommodate the needs to all parties

1. Based on a Bridgespan study looking at 11 years of merger filings in four states: MA, FL, AZ, NC. The number of organizations reporting at least one merger or acquisition between 1996
and 2006 was divided by the average number of organizations for the 11 years. This number does not include joint ventures, partial integrations, or asset/contract purchases
Source: “Nonprofit M&A: More than a Tool for Tough Times” Bridgespan (2009); Expert interview
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 Investing in Employment and Hope Non-profit

Advocacy and human services tend to pursue more

partnerships than other sectors

Some sectors more active in partnerships Favorable market

conditions for merging
(an example from child and
Civil rights, social
100% family services)
justice, diversity &
human rights
90% Education and lifelong High degree of competitive
learning
80% pressure
Other • Impersonal funding
70% sources (e.g. government)
Arts & culture • Focus on measured
60%
performance from funders
50% Community
development & housing Barriers to organic growth
40% • Asset intensive
Health & mental health • Local brand is important
30%
• Saturated market
20% Anti-poverty & social
welfare High levels of regulation
10%
Human services • Higher administrative
costs and complexity
0%
Joint Admin Merger Advocacy
programming consolidation
Source: Foundation Center‟s Nonprofit Collaboration Database; Bridgespan “Nonprofit M&A: More than a Tool for Tough Times” (February 2009)
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Appendix C: Process of M&A
 Investing in Employment and Hope Case learning

Trust, communication and follow-through are the three

themes of successful mergers
Trust is often what closes the Communicate early, often and Trajectory of future value
deal consistently creation set during integration

“…I gave them terms that I Develop a communication plan as 70% of deals that fail to create
wouldn’t have given anybody early on in the process as possible value can be traced back to poor
else, because I trusted the person • Create statements for both integration
sitting across from me.” internal and external
– Social enterprise communication “Getting a deal to close is in some
M&A veteran • Train deal insiders to stay on sense, the easy part. HR is the
message hard part and that comes mostly
“There will come a time when you after the deal is done. Merging
can‟t analyze anymore and you This allays fears, manages the cultures, the programs and the
just have to take a leap of faith. expectations, and gives the staff is really the challenge.”
The organizations that trust each organization time to get – Consultant
other can say, „Let‟s give it a shot comfortable
and work out the details as it • Deals can take a long time to
comes up.‟ The ones that don‟t can close. If you begin
drag on the negotiations forever communicating early, people
and still walk away.” will be ready to accept it by the
– Consultant time it becomes reality

The best communication plan has

statements for both success and
failure scenarios
• Keep a working draft on what to
say if you need to part ways

Source: Expert interviews; Bridgespan; McKinsey Quarterly

20
 Investing in Employment and Hope Process 1

Merging is often the final step to a collaboration process

that is already underway
Most merger deals initiated internally …with a counterparty that the
by management or board…. organization is already familiar with

About 60% of organizations that merge had

Who initiates mergers?
strong ties with the other party prior to merger
Volntrs/ discussions
Commnty • Almost 50% had already collaborated on a
3% program
Funder
Parent 14% Familiarity through previous collaborations can
org Mngmt be a critical pre-condition for initiating merger
6% 39% discussions…

…because trust is the #1 condition for success

• Fears about autonomy and self-interest can
Board be allayed if parties trust each other
38%
• Lack of pricing as a traditional bargaining
tool means trust is key to reaching a
compromise

A history of collaborating is the easiest way to generate trust

and get parties to the table for a merger discussion

Source: Foundation Center Collaboration Database; “Nonprofit Mergers: An Assessment of Nonprofits‟ Experiences with the Merger Process” Tropman Reports 2007
21
 Investing in Employment and Hope
“Degree-of-fit” checklist can be used to determine
merger partner‟s attractiveness
Criteria Priority of consideration
History of Previous Relationships
Mission and Values Compatibility
Assess each criteria’s
Consistency of Vision of Future Direction importance as high,
medium or low for the
Receptivity to Giving Up Some Degree of Autonomy particular purposes of
Program Strength the transaction under
consideration.
Organizational Size
For example, for a
Organizational Cultures are Compatible “speed to market”
acquisition, “Program
Board/Trustee Compatibility Strength” and
“Financial Strength”
Strength of Organizational Management and Staff Leadership
may be of high
Human Resources Integration Complexities importance. But for a
“export or recreate a
Potential for Operating Efficiencies successful model”
acquisitions
Financial Status (Including Endowment/Cash Reserves) “Receptivity to Giving
Up Some Degree of
Long-Term Sustainability Autonomy” may be of
Funders‟ Support of Partnership high importance.
Community and Stakeholder Perceptions of Merger
Source: “Merging Nonprofit Organizations: The Art and Science of the Deal” by the Mandel Science for Nonprofit Organizations (2001)
Process 1
Favorability
assessment
Assess the favorability
of each criteria with 1 =
Low Favorability and 5
= High Favorability for
the purposes of the
transaction under
consideration.
For example, for an
“underpriced asset”
acquisition, it is likely
that “Potential for
Operating Efficiencies”
will be favorable and
“Strength of
Organizational
Management and Staff
Leadership” will not be
favorable.
22
 Investing in Employment and Hope Process 2

Both Boards pass a resolution to engage in good-faith

negotiations
Many consulting firms will have
templates of resolutions that they can
provide
Sample Resolution
RESOLVED that the board of <insert your organization here> votes to
approve the comprehensive and systematic exploration of <insert The collaboration objective should
outline what the expected partnership
collaboration objective> with <insert counterpart organization here>,
arrangement will be: merger, asset
with the goal of effecting a <insert collaboration objective> with <insert acquisitions, asset transfer,
counterpart organization here> in the event that the results of this consolidation, joint venture
review confirm the desirability of such a <insert collaboration objective>
to the satisfaction of the Board; and
Negotiation Team should have equal
representation from both parties, be
That the Negotiation Team comprised of <insert list of names, title, and cross-functional, and include at least
organization represented> is authorized to take such actions as may be one Board member from each
reasonably necessary to conduct such exploration; and organization

That the Negotiation Team is charged with responsibility for The resolution can specify a purchase
recommending a course of action with regards to <insert counterpart agreement, MOU or some other
organization here> and drafting a <insert appropriate contract form> as contract form that is appropriate for the
needed for final review and decision by the board. collaboration objective in question

Passing the resolution is a way to ensure buy-in from the Board

before starting a resource-intensive process

Source: John Davis, “The Making of a Nonprofit Merger” 2002

23
 Investing in Employment and Hope Process 3

Gaps exist in the book-ends of the merger process

Lack of strong intermediaries in incubation, financing deals, and integration
Some gaps exist in the landscape of intermediaries Implications for funders
There is a need for tools on assessing
Incubation Exploration Negotiation Integration organizational readiness and identifying
attractive targets
• Funders • La Piana • La Piana
Huge need for capital to finance the
• Board • KrasnePlows
Facilitate acquisition or the initial start-up of a newly
members • Bridgespan merged entity
• Independent • Traditional debt can be difficult
consultants because many enterprises don‟t have
• Small business Gap: little a positive operating track record
Monitor/ agencies help • Funders can offer debt financing with
N/A • Perlman & available
Audit delayed interest payments
Perlman on making • Funders can help broker deals where
• Hurwitt & sure the the target is paid based on outcomes
• Edward Charles Associates reason for (e.g. a percent of revenue after $XM)
Institute • Pro-bono lawyers merging is • Funders can offer a reverse
Advise realized convertible bond – looks like equity up
Gap: few until a certain point and pays out like
brokers debt if the enterprise is successful
and • Lodestar Gap: few funders Assistance and funding for the integration
Finance/ funding for Foundation provide financing for process is another unmet need
Fund building • Community deals and funding for • Funders could provide integration
the field foundations integration capabilities, particularly to ensure that
the financial goals of the merger are
being met
Source: Expert interviews 24
 Investing in Employment and Hope Process 3

Median cost of non-profit merger is $35K

but can vary greatly
Median cost of a non-profit merger is
$35,000 but range from $7K to $1M… …covering a wide variety of costs
Hiring consultants to facilitate process
$120,000
Legal advice and paperwork filing
$100,000 Max Human resource audits

$80,000 One-time human resource fees (e.g. severance)

Integrating or upgrading technology systems

$60,000
Quartile 3 Contract cancellation fees
$40,000
Median Web, logo and signage redesign
$20,000
Quartile 2 Reprinting collateral
Min
$0
(1)
Cost of merging

1. Based on grants given by the Lodestar Foundation for organizations undergoing mergers. General-purpose collaboration grants were not included in this analysis.
Source: Lodestar Foundation; MergeMinnesota MAP for Nonprofits 25
 Investing in Employment and Hope Process 4a

Every strategic option explored should be able to answer

these questions
• Different than what will the vision of the merged organization will be
What is the vision for
• This can be principles to guide the merger process or outcomes that each organization hopes to
the merger?
accomplish through the process of merging

• This is the time to consider if one or both organizations will need to dissolve.
What structure will the
• Three options: one organization is folded into another, both organizations dissolve and a new one is
resulting entity have?
formed, or a parent-subsidiary relationship is formed

• Important to address because this can often be the most emotional decision and therefore the one
What will the new
most likely to derail negotiations late in the process
organization be
• It is also an invitation to address how the new organization will leverage the brand and reputation of
named?
the target and acquirer jointly

How will the new • Determine who from the existing boards will continue to serve on the newly merged entity‟s board
organization be • This is the time to address optimal board size, by-laws amendments, and any sub-committee
governed? structures

How will the executive • Having this question answered may dictate many of the choices the merger process makes in later
director be stages. Even if there is no name determined, the process for choosing should be agreed to.
determined?

• Depends on size, complexity and excess capacity of staff and leadership. The number of hours it will
What will a merger take to staff to get the deal to completion should be estimated here.
cost? • Areas to remember are public relations, technology integration, human resources, accounting,
facilities management, fundraising, program and staff administration, and consulting fees

• This may be dictated by the frequency of joint committee meetings, the communication plan, and
What will be the
the target completion date
timeline?
• Buffers should be built in: mergers always take longer than expected
Source: MergeMinnesota MAP for Nonprofits. 2009 26
 Investing in Employment and Hope Process 4b

Merging is a good time to evaluate new legal options

LLC has many favorable properties, but execution is more difficult

C-Corp 501(c)(3) LLC or L3C

Double taxation of Tax exempt. UBIT exception Pass-through taxation to
Tax treatment
corporation and owners for dividends and royalties owners. No tax on corp.

Some precedence to
Fiduciary risks Minor self-dealing concerns No risk
protect stakeholder views

Administrative Minimal paperwork. High Must meet IRS definition and Lots of negotiation
difficulty familiarity. qualify as related business required. Low familiarity.

Risk sharing Hard to share social and Can use different classes of Easy to share social and
properties financial risks separately debt only financial risks separately

Ability to lock in Difficult to maintain. B-Corp Included in governance and Included in governance but
social assets certification can mitigate. enforceable hard to enforce

Access to Opens up traditional capital Limited to grants or PRI. For-profit and non-profit
capital markets High administrative burden. investors can co-invest

Payout Debt and equity vehicles: Only possible through debt Possible to have debt and
structures dividends, interest, buyouts vehicles: interest equity. Need to negotiate

Supports social Mostly supports social Mostly constrains social Constrains social
enterprise goals enterprise goals enterprise goals enterprise goals

Source: Expert interviews; Thomas Kelley “Law and choice of entity on the social enterprise frontier”
27
 Investing in Employment and Hope Process 4b

Legal term definitions

Term Definition

C-Corp A corporation formed for the purpose of making profits and distributing those profits to owners and
managers

S-Corp A corporation that has between 1 and 100 shareholders and passes through profits and losses to those
shareholders directly. The S-corporation is not subject to a separate corporate tax.

B-Corp A certification standard that verifies the social and environmental commitments of a corporation for the
purposes of branding. It is not a legal status.

Benefit A corporation that provides legal protection for managers seeking to maximize value for stakeholders
Corporation(1) other than owners in return for requirements on reporting and auditing the corporation‟s social impact

LLC A partnership Formed and owned by members instead of shareholders. Members have more flexibility
on determining governance, management, and profit allocation than C-corps do. The LLC is not subject
to a separate corporate tax. Profits and losses are passed through to the partners who are each taxed
according to their own entity‟s tax status.

L3C (2) A form of a LLC with a more explicit purpose of pursuing social missions

Unrelated Tax levied on all income generated by tax-exempt derived from a trade or business, which is regularly
Business Income carried on, and which is not substantially related to the performance of tax-exempt functions. Major
Tax (UBIT) exceptions include passive income, such as dividends and royalty payments.

Program related A way for foundations to make investments that are risky or speculative ventures, so long as they
investment further the interest and activities of the charity‟s purpose. These investments are ordinarily considered
“jeopardy investments” and are prohibited to protect those that have contributed to the foundation.
1. As of July 2010, only Maryland and Vermont have passed legislation formalizing benefit corporations; 2. As of July 2010, Michigan, Vermont, Illinois, Wyoming, Utah, and Maine have passed
legislation recognizing L3C entities
Source: Expert interviews; 28
 Investing in Employment and Hope Process 5

Valuation methodology for acquiring a business

ESTIMATED Requires forecasting future Costs of closing the deal: legal

cash flows of the combined fees, due diligence, facilitation
Cost to acquire a target and acquirer business. costs, one-time financing costs
private asset ($K) Should be driven by cost- (e.g. finder‟s fees)
$1,000 savings (e.g. joint
procurement, shared
salesforce)
(Optional) Investments needed
$800 Model out future cash flows to make the asset fully
with expected probabilities that operational (e.g. delayed
Value that the asset can generate may be lost because of a maintenance, inspection or
by itself. Can be arrived at via an change in ownership (e.g. lost regulatory compliance fees)
$600
EBITDA or Sales multiple. customer relationships, key
employees departing)

$400 100 363 Difference

29 314 86 depends on
285 35
228 263 needs of
acquired asset
$200

$0
Stand-alone Synergies Target value Value-at-risk Maximum Merging One-time Total cost to
value (1) bid costs operating acquire
investments

1. Based on 2008 numbers as reported by Pratt‟s Stats database (for small companies) and as compiled by BV Resources. The median pricing multiples over sales in 2008 was 0.57 for asset
sales in services industries (SIC Codes 7000-8999). The comparable median revenue for this group was $0.5M;
Source: BCG report “The Brave New World of M&A” and expert interviews
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 Investing in Employment and Hope Process 6

Implementation planning should address all of these key

tasks
Finance and Programs and
Staff operations enterprises Communications
 Develop an integrated  Determine transfer of  Determine short- and Develop a post-merger
staff structure assets long-term program (and interim, if necessary)
 Develop job  Conduct final audit of priorities communications plan for
descriptions for new merging organizations  Develop new the following
and changing positions  Integrate financial and milestones for the stakeholders:
 Centralize personnel accounting systems joined entity  Grantors
files  Integrate finance and  Develop joint (foundations,
 Integrate pay scales operational policies operational budget corporations,
and benefits  Integrate technology  Develop individual government, etc.)
 Integrate personnel systems (internal, program budgets  Individual donors
policies (evaluation and website, databases)  Create an internal  Employees
performance  Integrate/update structure to coordinate  Clients
management, paid time insurance policies and integrate  The public/the
off and vacation days) (workers comp, programming activities media
 Develop a plan for new directors and officers  Program partners
and shared office insurance) and other
space  Integrate/update any stakeholders
licenses, registrations  Develop a marketing
(e.g. lobbying) plan for the newly-
merged organization
 Branding, logo,
letterhead
 Advertising

Source: MAP MergeMinnesota

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