Could there be a wave of charity mergers post-COVID?

This story is part of the Future of Good editorial fellowship covering the social impact world’s rapidly changing funding models, supported by Community Foundations of Canada and United Way Centraide Canada.

In June in British Columbia, as COVID-19 case counts were steadily dropping after a lethal second wave, United Way British Columbia was born.

The new organization — serving a population of more than 4 million Canadians — was the product of a massive amalgamation of six United Ways from across the lower half of the province. And while to some, the move may have looked like a financial-crisis-inflicted ‘pandemic merger,’ the CEO of the new organization, Michael McKnight, says that it was anything but.

“[It took] 20 years,” he says, with a laugh, of the length of time from first conversation between the organizations to the completion of merger. In reality, the merger took about two years, says McKnight, but the comment alludes to the work that the ‘merged six’, and other United Ways across the country, have been engaged in for many years to explore possible integrations. 

“The landscape of philanthropy is changing,” says McKnight. “We’re competing with the private sector in a number of different areas that we never used to have to, and the profile of donors is changing.” Over the past decade, United Ways across the country have faced considerable pressure from private fundraising platforms, like GoFundMe and Benevity; and have struggled to maintain dominance in the workplace campaign arena — normally the bread and butter of the network of charities. 

With these “headwinds” in mind, over the past decade, many United Ways have engaged in significant reflection — beginning talks and completing feasibility assessments, and exploring the community impact benefits of possible mergers. 

It’s this kind of reflection that many merger experts are seeing charities newly engage with during the pandemic. For some, this exploration is promoted by the acute financial strain of the crisis. But for many others, it’s work that’s rooted in strategic foresight and with an eye toward improved service delivery to clients. 

“If you think about the landscape of philanthropy and [about the] impact of the trends that we’ve been seeing over the last five to six years — they all remain the same,” says Poya Kherghehpoush, vice president of strategy and transformations at United Way Centraide Canada. “[But] what COVID has done [is it] has accelerated those trends. So, history has picked up in many ways.”

And while the pandemic has had a devastating effect on so many communities, the increased attention on organizational longevity is a smaller silver lining, say experts, because a properly executed merger can sometimes help agencies to do good better. 

Why hasn’t the prediction of a ‘wave’ of pandemic mergers come true yet? 

In the early days of the pandemic, many charity experts predicted that the charitable sector was on the cusp of a new wave of mergers. The predictions were based on alarming forecasts from many charity leaders about a steep decline in their revenue and a sharp increase in their community’s needs. 

“There was a sense of impending financial doom for the charitable sector,” says Scott Schaffer, principal of Public Interest Management Group, a British Columbia-based consulting firm that specializes in mergers. “There was the feeling that…a lot of charities may need to merge in order to stay financially viable.”

Yet, nineteen months later, from across the country, experts say that these predictions have largely failed to come to fruition. 

The reasons for this surprising trend begin with considerable government support. 

“A big factor [in the relative absence of mergers thus far] of course, were the federal supports that became available, whether through wage subsidies or grants through [the Department of] Canadian Heritage and other types of organizations,” says Melissa Tuplin, interim director of community investment for Calgary Arts Development, an organization that offers funds to the Calgary arts community to explore mergers, strategic partnerships, ‘hibernations’, or closures. 

And while the federal government’s support certainly aided the arts sector, the same was also true for many organizations across the social impact sector. By accessing federal wage subsidy programs, the Emergency Community Support Fund, rental support funds, and other sector-specific monies, many charities have — so far — been able to successfully remain afloat and independent.  

In addition, Schaffer says that many donors kept pace with their charitable gifts during the pandemic, owing in part to the strong performance of the stock market during the pandemic. 

And beyond revenue aids, Schaffer notes that many organizations haven’t merged, simply because they’ve had their hands full — and haven’t had the capacity to take on the work that comes with a merger. 

“So when you’re scrambling, trying to reschedule events, doubl[ing] down on relationships with donors, and also maintain[ing] a staff that may be working virtually for the first time — I think taking on a project like merger, which is pretty intense, can be difficult,” he says.  

Who has merged during the pandemic, and why? 

Of the organizations who took the merger plunge during the pandemic, they can largely be grouped into two camps, says Betty Ferreira, the founder of Goodcasting and ReStructure consulting, a firm that supports non-profit mergers. The first camp: organizations that were already facing significant financial trouble pre-pandemic; and the latter: non-profits that, facing some sub-sector disruption pre-pandemic, decided to try and get ahead of their future financial misfortune. 

The former group are often those who have had an over-reliance on one funding source, as well as “limited strategic foresight and agility, and limited financial leadership,” says Ferreira. These are organizations, she says, “that have difficulty recognizing the peril of this combination over many years and then suddenly and dramatically [close or merge] one day.” 

“Often the sudden decision to close is not based on a dramatic catastrophe but rather tantamount to a feather that knocked them down,” she says. 

For many of these organizations, the pandemic was the equivalent of being hit not just by one feather, but the whole bird — what with needing to cancel fundraising events, shift all donor engagement online and requiring staff to work from home. 

And while it might be easy to dismiss these organizations as unsophisticated, there are many legitimate reasons why non-profits might run into this kind of financial distress, including fewer available volunteers (with considerable pandemic-related caregiving responsibilities), an aging or financially stressed donor population, or otherwise. 

For his part, James Stauch, director of the Institute for Community Prosperity at Mount Royal University, warns against mergers amongst organizations facing this kind of acute financial crunch. 

“I actually don’t think that the drive for non-profits to merge out of necessity is a good driver,” he says. “I actually think that if you’re merging out of desperation…then it’s probably not a merger, it’s probably…one strong organization picking up the pieces of some weak organization. That’s not really a merger. A merger [always] results in a brand new organization.” 

In contrast to the group of organizations in acute financial crisis, there’s been another group who have merged during the pandemic: those whose merger was planned several years before the pandemic, and just happened to be finalized during a global crisis. 

One such merger took place just as the pandemic hit Canadian shores, in April 2020, between WoodGreen Community Services, one of Toronto’s largest multi-service agencies, and Accommodation, Information and Support Inc. (AIS), an organization that provided supportive housing to people with mental illness. 

At the time of the merger, both organizations were in a strong financial position, had a growing donor base and strong client services. So why merge? 

The chance for greater community impact. 

“There’s never been a better time, probably in the last 40 years, for the development of new affordable [housing],” says Michelle German, vice president of policy and strategy at WoodGreen Community Services. But just because the conditions are right, doesn’t mean it’s easy — especially for smaller organizations, like AIS, with less capacity and less capital to leverage. 

“We just put in a bid for a Housing Now site, and at the beginning I think there were four or five non-profits who were bidding on it. And by the end I think there were just two of us, because it’s so onerous, there’s so much involved [and] it’s so detailed,” she says.

With this in mind, the merger with AIS brought new strengths to WoodGreen in the provision of supportive housing for people with mental illness. And to the unification, WoodGreen brought considerable organizational capacity and a strong track record of securing government funds for new affordable housing development. 

“It’s just a reality that economies of scale and efficiencies and specialized skills are what’s required to address the problem as big as the one we’re facing,” she says. 

About a year and a half following the merger with AIS, WoodGreen announced a second integration, which brought JobStart, a large employment service provider, into the fold. 

This time, a provincial policy encouraging specialized service provision was a main catalyst for the shift.

“Employment Ontario is in the process of re-thinking the way it funds and operates employment and workforce development services,” says German. “So we, like many organizations, are looking at ‘how do we specialize [in] different groups’, or ‘how do we get better at understanding our program model or developing new program models.’”

As a result of this re-think, both WoodGreen and JobStart planned to double-down their support for hard-to-reach clients, a task they felt they could executive better together than apart. 

It’s for these sorts of reasons — the potential to secure additional government funds, the potential to offer more targeted programs to a specific client group, and more — that a new wave of organizations have been learning about mergers during the pandemic. 

Wanting to choose their own dance partner: Motivations for increased merger interest

“In terms of organizations wanting to explore the idea of unifying, we’re seeing it quite a bit,” says Maria Sánchez-Keane, principal consultant of the Centre for Organizational Effectiveness, a London, Ontario based firm that’s supported over thirty mergers. “But I wouldn’t say that it comes from a place of desperation in any way. It comes from a place of strategic thinking about how they can come out of the pandemic stronger.”

Ferreira has also seen an uptick in charities “more openly contemplating mergers than they were before the pandemic.” And for this group of charities, the motivation is three-fold, she says: “The emergency stage of the pandemic was not problematic for them but they are forecasting challenges in the recovery and post-recovery stages due to potential austerity, restructuring and transformation (imposed by government funders) and competition by larger non-profits and for-profit entities.” 

In her practice, Sánchez-Keane has seen these same motivations again and again, beginning with pressure from Ontario’s provincial government to fund fewer, larger organizations.  

“I do think that the government [of Ontario] has been really clear that in the end they want to have less transfer payment agencies and they’ve not shied away from that message in every sector,” she said. “I think people have that on their mind and I think many people want to move forward voluntarily with a partner they choose, versus being told.”

But despite the increased interest in organizational unifications, many organizations who explore this path won’t take it. And for good reason. Mergers demand considerable time and energy from boards of directors and staff, can be costly, and can be disruptive to program and service offerings. The United Way British Columbia merger, for instance, cost a couple of hundred thousand dollars, says McKnight, and required considerable time on the part of six boards of directors and executive teams. 

“I think board members are realizing that their responsibility is to the mission of [their] organization, not necessarily just to keep the organization afloat.” 

And even for those who do decide to initiate a merger, the process can get bogged down by innumerable snafus. 

“The charitable sector is fundamentally different from the for-profit sector, where you have equity that can be sold or purchased. That can’t happen with a charity,” says Schaffer. “So there’s no market force that compels a non-profit organization to merge. And what that means is that any issue can become an obstacle.”

Board members who don’t like each other. Disputes over the design of the new logo. The potential for an executive director to lose their job. The possibility that a local community becomes de-prioritized by the larger organization. Disagreements about which organization’s union will become the union of the new organization. 

All of these issues and more can kibosh mergers.

But, paradoxically, the pandemic may offer organizations a sobering kick in the pants to overcome the more frivolous among these issues.  

“I would say the biggest barrier that I’ve always experienced…is that protection of turf, protection of interests,” says McKnight, of his experience with merger talks at both Big Brothers and Big Sisters of Canada and United Ways. 

And while this was a part of the dynamic of the recent merger discussions in British Columbia, the financial pressure imposed by the pandemic contributed to a clarity of purpose. Several of the smaller United Ways relied heavily on events to generate donations. With the pandemic, these were impossible. “It was both an opportunity and a wake up call. The only way we were going to thrive, really was as a collective organization,” says McKnight. 

Facing an uphill climb on current and future fundraising, the smaller United Ways realized that they could benefit considerably from the donor engagement and policy advocacy capacity offered by the largest merger partner, formerly United Way of the Lower Mainland, says McKnight. 

And in addition, the process was likely smoothed by the design of the merger, which helps the organization to remain locally rooted. For the new organization, all money raised locally will be reinvested locally; and the organization will work to retain a physical presence in each community they serve, doing their best to keep all existing offices. 

Data, new funds and confidentiality help organizations think through merger options

In addition to the financial clarity offered by the pandemic, so too are some funders offering new supports to help organizations think through the options for organizational transformation.

In February, Calgary Arts launched a new funding program targeting local arts organizations considering organizational transformation. 

The aim of the program is to create a confidential space for theatres, visual arts, and other arts-based organizations to explore organizational change — something that often goes under-resourced. 

“As a public funder who exists to foster sustainable and resilient arts sectors…we can’t look at organizations and say, “Well, you should consider a merger. You’re not sustainable. You should consider closing,’” says Tuplin. “We have to put our money where our mouth is, [by] recognizing that it costs money to do this safely, responsibly and with care.” 

And while the program hasn’t seen considerable uptake just yet, Tuplin says that “more than a handful” of organizations have applied to receive support. 

And, a few hours away, in the Province’s capital, the Muttart Foundation has also increased their support to social service agencies that operate in Alberta or Saskatchewan that are considering mergers, closures or alliances. 

Through their ‘strengthening the charitable sector’ program stream, the foundation offers grants to support organizations with internal merger discussions, feasibility assessments and merger implementation. And to support the wider sector, the foundation also released a guidebook, in partnership with Miller Thomson, to support charities exploring restructuring or insolvency as a result of the pandemic. 

For a third merger support provider, data has been the name of the game. For several years, United Way Centraide Canada has been conducting research, working to identify the organizational capacity “threshold” at which United Ways perform best, says Kherghehpoush.

Through this research, the team learned that organizations in their network with more than 12 or 13 full-time equivalent staff tend to perform best on several important indicators, including market share, average donor per capita or the amount of “major giving” the organization receives, he says. 

It’s at this size that United Ways tend to have one staff member for every functional need — one full-time staff member for marketing, donor engagement, community impact, and more. 

And while this research hasn’t directly spurred any mergers, says Kherghehpoush, it has helped executive directors and boards to be more knowledgeable about organizational performance and sustainability — and to help them plan for community impact long into the future. 

Looking into the crystal ball again: are more mergers on the horizon? 

The conditions seem ripe for more mergers to begin taking place — more executive directors and boards educating themselves about their options, new funder and network support and added COVID-19 financial strain. But will these conditions actually lead to new non-profit marriages? 

Experts say that yes, this time we truly can expect to see “some uptick” and a moderate “bump” in merger activity, owing to a combination of these forces. 

For their part, Woodgreen has already been approached by several other organizations interested in exploring strategic collaborations, mergers or other integrated partnerships. And for each of the consultants interviewed for this story, interest in mergers is on the rise. 

“To be honest I think that there are a lot of people that are realizing: ‘You know what, this isn’t necessarily a bad idea to join forces and serve the community better,’” says Sánchez-Keane. “I think board members are realizing that their responsibility is to the mission of [their] organization, not necessarily just to keep the organization afloat.” 

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