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Assess self before seeking partnership

“There is nothing to fear but fear itself.”
–Franklin Delano Roosevelt
One of the significant challenges facing non-profits today is the demand for cost-effective, quality services. Government funders, public contributors and consumers are clamoring for “more for less” as the “Wal-Marting” of the American economy pushes its way through the non-profit industry.
The merger-and-acquisition frenzy of the go-go ’80s was prompted by entrepreneurial business leaders identifying an opportunity in both public and private markets. The undervaluation of many businesses in the stock market created “value” opportunities that made T. Boone Pickens, Ross Perot and Ivan Boesky household names.
The value opportunity in the for-profit sector does not generally apply in the non-profit sector. Structurally, non-profits do not have issued stock. They are generally organized as membership corporations with volunteer boards of directors. The net assets of any non-profit are managed by the board and executive management. As membership corporations, non-profits cannot be bought and sold like their for-profit counterparts.
Mergers and acquisitions in the non- profit sector are subject to the approval of the state attorney general. Non-profits can convert to for-profit status subject to regulatory approval. However, in the conversion, the net assets or value of the non-profit must be distributed to a qualified charitable foundation or to the state.
Conversion to for-profit status has become increasingly popular in this country as a means to access capital to compete. To date, this conversion approach has been concentrated in large organizations in the health care industry (e.g., Blue Cross plans, hospitals and nursing homes). More often, non-profits establish a for-profit affiliate or subsidiary to accomplish their capital-acquisition objectives.
In the face of competition and market demands, the typical non-profit response has been to identify collaborative opportunities with other non-profits. These collaboratives can take the form of a merger, consolidation of services, acquisition or network alliance.
Collaboration offers a desirable alternative to a for-profit conversion since most non-profit organizations can achieve cost-effective results while maintaining their voluntary charitable mission. The recently announced merger of Mount Sinai Medical Center and New York University Medical Center in New York City is an example of this trend.
In the current industry environment of competitive pressures and demands for cost-effective, quality services, non-profit board members and management are faced with an interesting question: How do we determine whether our organization is a candidate for a merger, acquisition or network alliance?
The answer to this question requires an evaluation and assessment of the organization’s strengths and weaknesses. As a consultant to many non-profit mergers, consolidations and dissolutions, I have developed a list of five critical success factors that are common to all successful non-profit organizations. Assessment of these topics can be helpful in analyzing every organization’s strategic approach to mergers, acquisitions and collaborative relationships.
These five critical success factors are: financial strength; fund raising and constituent support; public image of high- quality, efficient services; board and volunteer support; and management leadership with vision.
Each of these areas can be evaluated by the board and management to assess the appropriate positioning of the non-profit relative to mergers, acquisitions and collaborative relationships. The areas are interrelated and of relatively equal importance in most cases.
–Financial strength: Without question, financial success breeds success. Each organization should be evaluated on the same basis as its for-profit counterparts. Financial-ratio analysis with comparisons to both competing and similar-size organizations can be valuable tools for management and the board to determine the relative strength of the organization’s financial position.
The top five elements in this analysis are: number of days’ worth of operating cash on hand (liquidity); total liabilities to net assets (leverage); percentage of operating bottom line to total revenues (operating-performance ratio); number of days’ revenue tied up in accounts receivable (turnover rates); and cash flow from operations.
–Fund raising and constituent financial support: In 1995, charitable giving in the United States was up almost 11 percent to a total of $143.8 billion. As you have observed in reading your mail and answering your phone, the frequency of local non-profit solicitations has increased dramatically. Circumstances vary; however, a realistic target for fund-raising efforts is to annually generate at least 5 percent of the organization’s revenues from outside fund raising.
–Public image: Look at the hospital in Florida where the wrong foot was amputated or at the recent ValuJet tragedy to assess the impact of public image. Positive image requires a continuous effort as it is difficult to maintain. However, as Xerox Corp. and Eastman Kodak Co. both have demonstrated in the past 10 years, image is largely dependent on the organization’s ability to provide quality products and services at a competitive price.
This same rule applies to non-profits. Benchmarking non-profit performance from both a quality and cost perspective is now an imperative. The markets that buy non-profit services will ultimately decide the success of each organization by rewarding those non-profits that consistently demonstrate the ability to provide high-quality, cost-effective services.
–Board and volunteer support: A successful non-profit organization must have the ability to recruit, retain and develop board members who will provide direction, support and vision. An effective board provides both financial and volunteer support to the organization. Achieving and maintaining cultural diversity and identifying board members with necessary areas of expertise are the focus of board-recruitment efforts.
–Management leadership: An effective management team provides the internal direction and sets the character and style for the organization’s staff. An important element in developing and maintaining an effective management team is an annual performance-appraisal process. As part of this, the board must provide feedback to the executive director. A clear and consistent vision statement is critical to the communication process necessary for developing staff teamwork and efficient operating results.
There are many challenges facing non- profit boards and management. The first step in the process of collaboration is an internal assessment of strengths and weaknesses in the areas discussed in this article.
(Gerald J. Archibald, a CPA, is a partner in the regional accounting firm of Bonadio & Co. LLP. He is active professionally and personally in an array of non-profit organizations.)

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