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Building stronger together: M&A due diligence for NFPs

Collaborations to advance your NFP - A Baker Tilly series

Oct. 17, 2023 · Authored by Riley Newsome

This is the second article in our NFP collaboration series.
Not-for-profit (NFP) mergers and acquisitions (M&A), joint ventures and strategic alliances have become increasingly important as organizations face challenges such as funding constraints, competition, and changing regulations and marketplaces. M&A can help NFPs address these challenges and achieve their mission more effectively. A merger or acquisition can also help organizations expand their reach and improve their programs and services by combining resources and expertise.

M&A and other collaborative arrangements can provide several benefits to organizations, including:

• Improved efficiency and effectiveness: M&A can help not-for-profits improve their efficiency and effectiveness by combining resources, reducing duplication, creating economies of scale, and sharing best practices.
• Increased impact: M&A can help organizations increase their impact by expanding their reach, improving their programs and services, and addressing organizational challenges.
• Financial stability: M&A can help NFPs achieve financial stability by combining resources and creating a more sustainable business model.

When an NFP organization considers a merger or acquisition to achieve its mission and goals, financial due diligence plays a critical role in the process. Financial due diligence helps organizations on both sides of the deal assess their own position as well as the financial health and performance of the potential partner organization and identify any financial or risk profile issues that may impact the transaction.

Let’s explore some of the financial due diligence considerations for not-for-profits.

1. Financial statements review

The financial statements of the potential partner organization should be reviewed carefully to assess the financial health and performance of the organization. This review should include an analysis of the target entity's financials at the trial balance account level, at which level most effectively allows for analysis of account level trends and anomalies. The review should also assess the quality of the financial statements, including the accuracy and completeness of the financial data.

2. Revenue and expense analysis

A detailed analysis of the revenue and expense of the potential partner organization is crucial in assessing the sustainability of the organization. This analysis should include a review of the sources of revenue, expense structure, and grant or donor funding history. The analysis should also look at the financial sustainability of the organization, in terms of free cash flows, and identify any potential risks that may impact the transaction, such as a reliance on a single source of funding or an unsustainable expense structure.