Moving Forward with Nonprofit Mergers, Reorganizations and Closures

For many charities, there comes a time where significant change is necessary. Maybe your nonprofit is ready to expand program lines or link arms with another organization doing similar work. Maybe your nonprofit has fulfilled what it set out to do, and you’d like to tie up loose ends before closing it down. No matter what stage your nonprofit is in, we’re here to be the ally in your corner.

We’ve compiled these resources for nonprofit leaders who are approaching one of these avenues for significant organizational change: mergers, reorganizations and closures. But remember: each scenario is unique and can benefit from having a trained nonprofit attorney to help.

Nonprofit Mergers 

Debunking the “Hostile Takeover” Stereotype

There are several types of nonprofit collaborations, the most formal being a merger. A recent study that analyzed 25 nonprofit mergers found that 88% of nonprofits that merged felt they were better at achieving organizational goals and increasing their impact after the merger. 

However, nonprofit leaders often still find the prospect of a merger to be daunting, and understandably so—in the for-profit world, headlines about mass layoffs and hostile takeovers are commonplace. 

Rest assured that in the nonprofit world, mergers can be a sign of a bright future. As you determine whether a merger is right for your nonprofit, consider these scenarios in which a merger can bring about positive change and a variety of benefits for everyone involved. While nonprofit mergers are not without their challenges, a merger may truly be in your organization’s best interest. 

Charting a Course

We’ve seen that even those merging under the most ideal of circumstances can have mixed emotions about it. Nonprofit leaders may feel excited, overwhelmed and apprehensive all at once about their next steps into unfamiliar territory, and that’s why it’s helpful to have a nonprofit attorney (like one of ours!) assist along the way. 

Keeping in mind that every merger’s situation and timeline is different, we’ve outlined some basic steps you can expect. These steps include:

  1. Letter of Intent (LOI) 
  2. Due Diligence 
  3. Merger Agreement/Negotiation 
  4. Articles of Merger/Plantiff Merger

You can read about each step in more detail here. Going into a merger, knowing what to expect can be half the battle. Preparing your nonprofit beforehand can help the merger process go more smoothly and quickly

However, mergers are not a one-size-fits-all solution to every nonprofit problem. If you change your mind in the midst of a merger or if the merger turns out to be less beneficial than expected, you have the opportunity to “undo” the merger. There are three possible avenues, which will vary by state. 

That’s why it’s helpful to partner with a nonprofit attorney who can help your organization weigh its options while staying true to your mission. We provide comprehensive merger services, including negotiating terms, drafting new or revised articles and bylaws, preparing merger agreements, and more. Let us know how we can serve you and your organization no matter what stage of nonprofit mergers you’re exploring. 

Methods for Reorganizing

Reorganizing vs. Restructuring

“Reorganization” and “restructuring” are terms that are commonly used interchangeably among nonprofit leaders, since both usually reflect an organization’s desire (or the necessity) to change directions. However, there are three primary methods to go about these changes, and defining each term matters when comparing the differences. 

Internal restructuring is the term we use to describe when an organization wants to change the way things are operated—for example, adding or subtracting a program or modifying governance. Restructuring can be done on both a large or small scale.

Reorganizing, on the other hand, is the term we use for a more formal process, usually involving a neutral third party and a court. These methods may include bankruptcy or custodianship. To learn exactly what’s right for your unique situation, we recommend consulting a qualified attorney.

Reorganizing: Seeking the Fresh Start

Especially when struggling, sometimes charities just need a bird’s-eye view of their circumstances before moving forward. Whether you’re closing a program by finding it a new home or dealing with snowballing financial concerns, reorganizing can help refocus your organization to its most pressing needs.

Custodianship is a reorganization option based in state law. It’s where a custodian is appointed to manage the affairs of the nonprofit with an eye towards salvaging it as a going concern, then handing control back over to a nonprofit’s board, rather than liquidating all assets and closing the organization. 

When a charity cannot pay its debts as they come due or do not have enough assets or property to cover them, these organizations need to undergo assessment to see if they’re truly facing insolvency. It’s important to note in these circumstances that an insolvent organization’s board of directors still has many specific responsibilities, and otherwise can be personally liable if these duties are not properly addressed. 

Sometimes, reorganization is a sign a nonprofit is approaching its final significant change: closing.

Getting Closure

Clues to Close

There are three telltale signs that can help nonprofit leaders determine whether it’s time to dissolve (close) their charities. 

  1. Insolvency, as noted above. If you’ve assessed your nonprofit and found that it is truly insolvent, it is time to close. If you continue operating the nonprofit past the point of insolvency, then you may deepen the insolvency and be subject to personal liability from creditors, putting you on the hook financially.
  2. No incoming revenue. It’s common for charities to experience ups and downs in funding, but if revenue streams have completely dried up, it’s a sign closure is near.
  3. Mission accomplished! This is the best-case scenario—your organization has met a need and operating it is no longer necessary. 

If these three signs it’s time to close your nonprofit resonate with you, it’s time to determine  next steps. No matter the reasons you’ve decided to dissolve, you’ll want to close responsibly and leave a positive impact.

From a voluntary dissolution to more complex receivership cases, there are multiple ways to close. You can learn more in-depth about five different methods to close a nonprofit  as you consider what the future holds. Then, you can make a checklist to make sure you’re considering each step in the process, such as honoring donor intentions, dissolving contracts, and preparing board resolutions. And we’d love to help you cross the finish line and leave a legacy that you’re proud of. 

Your Ally in Times of Change

Through the bright beginnings of a merger or the winding down of your nonprofit, you’re welcome to request a consultation with one of our experienced nonprofit attorneys. We’re here to help at every stage in the life cycle of your nonprofit so you can focus on what matters most: your mission. 

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