A merger story rooted in financial motivations
By Sidni Shorter In Collaboration / M & A Posted November 18, 2013 0 Comments

A Merger Story with a Surprise Ending

Moviegoers might say this nonprofit story has a plot twist. If I were to share the two main characters are organizations entering into a discussion about a merger, you probably could guess how it turns out, right? Get ready for a surprise ending.

The story of two relatable characters with financial pains

More Than Wheels, a group Terri Steingrebe runs, helps people in New England find low-interest car loans. Jeffrey Faulkner is the president of Ways to Work, a much larger car-loan group with headquarters in Milwaukee.

More Than Wheels was experiencing growing pains and desperately needed to expand to meet the needs of its growing clientele. Ways to Work has 53 affiliate offices in 23 states and an annual budget of $4 million—three times what More Than Wheels has. However, Ways to Work was having challenges of its own. Its reliance on foundation grants made for a chancy growth plan and the leadership felt Ways to Work needed to make bigger car loans and offer stronger programs to help people repair their credit after they’d taken out those loans. In short, it needed to be more like More Than Wheels. Faulkner was quoted in The Chronicle of Philanthropy article as saying, “One of our shortcomings was that we could take our clients only so far.”

The dialogue begins

With support from SeaChange Capital, a group in New York that offers grants to facilitate merger and acquisition discussions, the groups met with Root Cause, which was brought in to make sure both organizations disclosed vital information and kept talking. For nine months, the two nonprofits exchanged financials, management approaches and ideas about how to blend their operations.

Steingrebe appreciated Ways to Work’s loose affiliate model. Her group also liked the fact that the Ways to Work model relied less on creating full-fledged offices than on franchising smaller, less-costly ones. Ways to Work liked More Than Wheels’ ability to handle some of its costs by charging for its services as well as how it more accurately evaluated which borrowers would be more or less likely to pay back loans.

A surprise ending

In the end, both groups decided they would adopt certain aspects of each other’s models rather than merge. The nine months of transparent information exchange turned out to be an incredibly valuable education in how to modify each model to meet its respective goals. Both parties couldn’t overstate the value of exchanging ideas and now recommend third-party mediation and absolute transparency about operations and finances. Otherwise, neither party would have an accurate sense of the merger’s viability.

The financial moral of the story?

Diversify your revenue. Ways to Work (the larger organization) was too reliant on grants even though it was perceived as being “healthy.” If Execute Now! was a character in this story, we would have agreed with Ways to Work’s desire to diversify its income and depend less on grants.

Nonprofits need to think more strategically about their business models and determine what needs to change in order to decrease their dependency on this type of revenue.

A friend of mine who is a leader of a large nonprofit in Baton Rouge has a pithy way of summarizing this point. He says, “No margin, no mission.” Overreliance on grants doesn’t necessarily help you achieve sustainability and build reserves. Rather, it can arguably hinder you from fully meeting your mission. This is primarily because of the grant limitations and inflexible use of dollars.

What is your current revenue mix in your nonprofit? How much of your budget is dependent on securing restricted grants? If your answer is over 33% percent, you should consider your alternatives to secure your mission’s future.

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