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Tips and Answers
to Your Questions
Financial Issues
I am involved in a merger of 2 non-profits. I was
interested in the steps of combining accounts - general operations,
restricted funds, and investments. If you have any guidance in this
area it would be appreciated.
The first thing you should do is gather a comprehensive set of financial
statements and backup material from each organization. This is a standard
part of due diligence, so depending where you are in the negotiation/integration
process, you may already have done this.
Next, do a side-by-side comparison of each organization's statements.
One way to do this is to create a spreadsheet for each statement (Statement
of Financial Position, or Balance Sheet, and Statement of Activities,
or Income Statement).
The spreadsheets should include rows for each line item on the statements,
a column for each organization, and a column for the totals, assuming
that you are combining the two organizations, and thus the values on
their statements. From the initial totals, you can make adjustments.
For example, you might decide that although the total management expense
for both pre-merger organizations is, say, $300,000, in the merged
organization it would be slightly less, as you will be eliminating
one ED salary and adding one additional accounting person, whose compensation
package is less expensive. Once you make your adjustments, you should
have a fairly good idea of what your combined finances will look like.
With regard to restricted funds, look closely at what the restrictions
are, and how they might impact the decisions you make about how to
implement the merger. Do any of the restrictions mention changes to
the corporate structure of the organization? Are some of the funds
restricted by the board, and thus the board can redefine the restriction?
Are there funds restricted for use in certain geographic areas, and
if so, will the merged organization still be able to deploy those funds
in that geographic area? Before finalizing your agreement to merge,
clarify how the merged organization will continue to honor the restrictions
in place. It will also be useful to know which funds are truly restricted,
as opposed to board designated, and what the merged board's intentions
would be for designated funds.
As with the financial statements and the background information on
restricted funds, you will need to review each organization's investment
policies and practices. The board should create an investments committee,
if it doesn't already have one. The committee, with the board's approval,
will need to come up with a new investment policy for the merged organization.
What types of investments will the organization make? What is the risk
tolerance of the organization? What mix of investments is desirable?
Once the guidelines are clear, the actual act of moving money around
to consolidate investments is not difficult. Be sure you have a finance
staff that is equipped to handle the demands of a larger organization,
and a potentially more complicated financial picture.
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