Nonprofits Are Businesses Too
Updated: Mar 31, 2022
Corporate Strategic Advisor Matt Kouri explains how nonprofits relate to for-profit businesses.
Most folks do not associate the nonprofit world or social sector with things like mergers, acquisitions, joint ventures, or similar higher-order partnerships and business models. To most, nonprofits are seen as good little organizations that always put others first, deliver helpful services, and mostly stay in their lane. Recruit volunteers, throw a gala, do good deeds, publish a pretty annual report, lather, rinse, repeat…
But charitable organizations are in fact businesses (“nonprofit corporations” to be exact) that must think critically about business concepts like sustainability, growth, competition, long-range strategy, market definition and segmentation, strategic partnership, and yes, even M&A.
In the 20+ years I have been leading and consulting with nonprofits, I’ve been blessed to be part of more than 25 formal nonprofit mergers, and dozens of other strategic partnerships that stopped short of merger. I’ve led combinations of art museums, health clinics, disability services providers, cancer organizations, senior services groups, faith-based organizations, and many others. And in each case, we developed robust business cases for the merger, held intensive term sheet negotiations about power and structure and strategy, brought in attorneys when needed, drew up complex business agreements that often included sums of money changing hands, and in many ways acted just like for-profit companies do when they join forces.
But M&A in the nonprofit world, and even less extreme forms of strategic collaboration, operates in many ways very differently from the for-profit world, including in these manifestations:
1. Ownership. Companies have clear owners, whether individuals/families, shareholders, other businesses, etc. But nonprofits (much to many founders’ chagrin) are not owned by anyone. In fact, nonprofits are unique legal entities that live “in the public trust”, governed but not owned by a board of directors, and entrusted with the fiduciary responsibility of stewarding donor dollars toward missionally aligned activities. While this “ownership” structure is in many ways a beautiful thing, it can add complexity to partnership situations. In such processes, two boards are asked to simultaneously protect the best interests of the nonprofit they govern, while also envisioning a future in which that nonprofit may change dramatically, or even cease to exist, but in which the underlying mission may be more effectively achieved.
2. Money. Most for-profit partnerships are driven primarily by financial analyses and the promise of better financial outcomes. And while money is certainly an important factor in nonprofit mergers and partnerships, it is not the primary consideration. Rather, the ability to serve more people collectively than apart is often the “gold standard” for whether a nonprofit merger makes sense.
3. Culture. Nonprofits are almost exclusively in the people business (only slightly less so for animal and environmental charities!). People populate nonprofit boards, they serve as volunteers and staff, they receive services, and in most cases are the ultimate “product” of nonprofit work. As such, nonprofit culture (peoples’ core values, norms, ways of working together, etc.) plays an even more important role in evaluating whether a merger makes sense, and in determining whether a partnership ultimately fulfills its potential.
4. Conflict. In business partnerships, conflict is often a natural, even beneficial cog in the wheel of progress and optimization. But in the nonprofit world, conflict is often hard to find and even harder to navigate when it does emerge. Maybe it is because nonprofit leaders and board members are typically deeply missionally driven and aligned, or because they focus so much on encouraging and supporting each other in the hard work that is the charitable world, but my experience is that most nonprofits are rabidly conflict-averse. And while that may make everyone feel better about their nonprofit experience, it is not always conducive to healthy dialog, negotiation, and confrontation of hard truths – all things that tend to result in the best partnership decisions being made.
5. Capacity. Most social sector organizations are by definition resource-poor. Never enough staff to meet the overwhelming need for services, never enough funding to sleep well at night, and never enough brain-space to truly be strategic. So often, even the idea of a nonprofit leader or board taking the time to pursue a complex strategic partnership is prohibitively overwhelming. As such, successful partnerships and mergers tend to be characterized by funders stepping in to underwrite the added costs and staff time needed to explore them, creating the capacity needed to be more intentional and strategic about collaborative growth. While donors should never feel the right to use their funds to force a charity into a partnership or direction that may not be warranted, they can often come alongside such organizations with both the encouragement and the resourcing to help a good thing happen.
Having spent about half of my career in the for-profit world, and the other half in the social sector, I am of the deep belief that both sectors can improve their outcomes significantly by implementing many of each others’ best practices. Nonprofits should embrace many of the proven principles from business to achieve better outcomes, including in the arena of strategic partnerships and mergers. And at the same time, those who find themselves in a position to promote and lead such partnerships in the social sector should do so in careful and thoughtful ways, taking fully into account the uniqueness of doing business, while doing good, in the charitable arena.