Latest news, alerts, and events.
Latest news, alerts, and events.
The nonprofit sector is changing – more than the usual flux we expect for a sector that meets communities’ needs and responds to gaps that government either can’t or won’t fill. We expect that. We see that. But based on new federal policies and the state’s shifting priorities, changes will be and already are monumental.
How it settles out is unclear. There are hundreds of lawsuits still to play out. The new federal budget bill will take years (in some cases until 2028) for the full impacts to be felt and many decisions are already taking their toll.
In the article, It’s Personal: Why Nonprofits Matter to Everyone, we explored all the quiet ways nonprofits make our communities, our society, and our democracy work. Most people don’t notice but that’s because the sector is “just there,” but change is coming in ways we have yet to anticipate.
What is clearer today than even a week ago is that with no runway to plan for a shift in funding or policy priorities, some organizations will not survive. Others will struggle to hold on to current ways of serving their communities, and still others will face an increased demand to meet needs with little or fewer resources than they have today. How all the changes impact each organization will be specific and, yes, some will be untouched.
While we hope for the best, we plan for the challenge. Below are five real choices to consider for scenario planning if and when they are needed.
Any step that brings cost savings should be explored. Shared approaches like back-office outsourcing among organizations can be viable options. Shared employment, group purchasing and shipping/freight, or joint communications focused on causes that highlight several connected missions are all good options. That said, sometimes we get in our own way by overly considering the importance of singular missions rather than the power of moving together. Maybe now these considerations seem more palatable. They still take up-front work, savvy “shopping” for the right partners, and good financial planning to know that cost savings and hopefully savings in stress will be the result. Certainly no one-size fits all models exist, but there are great choices if it means the result is a steady mission or even more mission results.
For certain organizations with financial savings, mergers or acquisitions may be possible if there is also emotional will from enough people to do the hard work. A popular myth says that mergers are the answer, but this ignores the fundamental drive that created the organization’s mission in the first place. Worse, it holds the sector to a lesser standard than private industry, which is regulated to ensure that no harm comes to the customers it was supposed to serve. Instead, what is true is that merger and acquisition work in the nonprofit sector is slow and careful and is done by deeply committed people who are trying to do better by their communities. Also true is that even after all that work, the result might make sense for mission delivery but rarely makes sense financially (at least at first, and maybe for much longer than that). Additionally, part of the slowness of the work, but some of its most essential pieces, are beyond the legalities and structures and more about the culture and values that are left standing. Ultimately, if this work is skipped, the organization is plagued by a “smooshed” culture that has immense issues knowing who they are and what is core to their decisions. Worse outcomes are staff divided, board cliques, distrust, and more. Attending to the cultural aspects of any collaboration is the ingredient that matters the most.
The choice to be acquired or become a program of something else can be a faster option than full merger. Yet, like a merger, this option will move at the speed of trust and still requires a positive financial scenario in the short and long term. In this case, the less financially strong organization(s) approach a more stable organization with mission alignment and offer up intellectual capital, donors/members, and all assets and liabilities. Ensuring that any overlapping donors will not simply give one same sized gift rather than double their one gift is often tricky. Attention must also be given to other stakeholders to ensure they are aligned to the new intent and structure. There is a continuum in this choice that attempts on one end to preserve brand, ultimate intent, and maybe even core cultural components, and on the other end is more a Pac-Man style where the program lives on but is subsumed by the larger organization in whichever way works best for the standing organization. The latter is faster but emotionally much harder.
It would be nice if we had time to pair these organizations in some neat and tidy way that left no gaps in service or, worse, created dire consequences for the people and places that rely on the sector’s support every day. But for some organizations, time is up, money is tight, and the commitment to do the extra work right now is waning.
The lesson learned, if you are considering either merger or acquisition, is that it starts with leveraging resources, harnessing the energy of people, and providing more or better service to the community. If this is the choice – take all the steps.
The going rule in a for-profit business is that 50% of them don’t make it within the first five years. Closure is part of the calculated risk. The customer decides if they want to purchase what the seller has to offer, and essentially market forces both from the seller and the buyer determine if the business survives or thrives. There is no such mechanism in the nonprofit sector. Instead, it happens as a choice of the board. By definition, nonprofits are serving “the greater good” and thus there is something about the work that was never viable in the marketplace. Maybe it is education or food or housing or vaccinations or environmental renewal or care for our elders or our littles. Of course, it costs money. Nonprofit status is a tax status that ensures greater good, but it is not a business model. The business model is more complicated than widely understood and is often comprised of a delicate balance of mission-related earned income and charitable funding and in many cases, but not all, a partnership with government (federal, state, local, tribal) to ensure the population is served based on the laws and will of society. Generating revenue is a constant source of attention and saving it takes expertise, longevity, and a lot of work.
All to say, the nonprofit sector is rarely cavalier about revenue and must simultaneously be far more responsive to rules, conditions, and scrutiny than for-profits. So, the choice to close is a big deal with many steps.
If the board really believes it’s done, that the mission is no longer meeting a community need, or in the case we are seeing now, the government no longer wants nonprofits to meet that need and withholds funding, and all other options have been exhausted, then the choice to close is the right choice.
That said, it still requires many steps and a long process. Nonprofits cannot just close their doors and be done. This Checklist for Dissolving A Nonprofit outlines 27 minimum steps (in Alaska) that will likely take at least the last remaining board members (and a lawyer) a year to complete (including filing the last paperwork with the IRS). Compliance is still a priority to ensure that any remaining assets after liabilities are donated to a similar mission. Afterall, nonprofit assets are gleaned in the public’s trust and donor intent, and public good applies to every last dollar. Also, a priority is communication with donors, community investors, stakeholders, elected officials, and more to tell your impact story in your own words – to leave a legacy – to acknowledge the good and to redirect donors to invest in the next way your community will work on the larger issues your mission cared about. Don’t skip this step because this work was always about more than a single organization.
But what if your mission is not done? What if a real possibility still exists that thriving and not just surviving is possible in a different political context or with more time to strategize how to diversify revenue in a meaningful way? What if “no” is not an answer and a just a little longer runway and a moment to regroup would make all the difference? In this case, “simmering” may be the best choice.
Simmering starts with what Jim Collins in Good to Great calls, the Hedgehog Concept or the practice of telling all the truth (what Jim calls “confronting the brutal facts” and reconnecting to what is core by answering three questions as a team: “What are you (the organization, including the board) most passionate about? What are you the best in the world at? And what drives your economic engine?” At Foraker, the economic engine caveat is that the answer must focus on the source of unrestricted cash not restricted funding. The lack of unrestricted cash is at the heart of why so many nonprofits are at this crossroads now. The intersection of these three answers is the equivalent of what is MOST core. The hedgehog concept is powerful and meaningful and helpful for every organization, but at this pivot point it is an essential first step for the team’s alignment.
The next step is to determine if simmering then means honing the organization all the way down to no programming while you reposition it to focus on your hedgehog or scale down to one program or some combination of efforts to become small and extremely focused. These choices can mean letting go of staff (assuming there are any), stopping or reimagining programs and paring down the board depending on how quiet the work is going to get. It can even mean eliminating everything except for the yearly compliance requirements outlined in the bylaws, and by the state and the IRS.
Whichever path of simmer you take, communication is key with donors, community investors, stakeholders, elected officials, and more. Be clear about what “simmering” means and the future opportunities you see to resume to a “rapid boil.”
Ultimately, why would you simmer? You would if the team thought there was hope in the future and a better way forward can be found with more time to plan. And, if the calculation is wrong, well, it will be easier to shut down knowing that the milestones were not attainable even with a longer time horizon. And, if your calculations are right, it will be much easier to move back to serving your community without having to start from scratch once the current economic and political storm has passed and a business model is clearer to chart.
What’s next?
Five hard choices in a time where the only thing that is certain is uncertainty. The temptation may be to hunker down in fear of the unknown, but the nonprofit sector was built for action. To respond. To innovate. To deliver. Standing still is not in service to mission. The choice must be to take action to advance – with our donors – with our volunteers – with each other. Action may be to find a path forward or to release the people, time, money, and resources back into the community so that it can reformulate into what it will support next.
We are ready to stand with you in your choices. Call us for your next step or sign up for our free open office hours.