Business Operations

Mergers and Acquisitions: Key considerations for social enterprises

Introduction

As the field of social enterprise matures, so has interest in different ways to scale social enterprises beyond organic growth. One option for achieving scale faster than organic growth is through mergers and acquisitions (M&A). The concept of mergers (when two entities become one through an equal joining of governance and operations) and acquisitions (when one entity takes over another entity’s operations and governance) is relatively common in the for-profit world. It is less common in the nonprofit world, and the mechanics of nonprofit M&A are different since the concept of ownership of a nonprofit is different. In the world of social enterprise, it is even less common, but some examples do exist, and some of the tools and lessons from both nonprofit and for-profit M&A can apply.

In this article, we will focus specifically on the application of M&A as a tool to scale social enterprise. There are many external resources available to cover detailed aspects of for-profit and nonprofit M&A not related to social enterprise. This article will focus on some of the motivations for doing so and explores potential considerations for each.

 

Why pursue social enterprise M&A?

There are many different forms of partnership possible in the world of social enterprise:

partnership-structures

This article focuses on the last two types of partnerships, mergers and acquisitions, which both involve the legal combination of two entities into one. In the context of social enterprise, not all mergers and acquisitions are created equal.  There are different reasons an organization may want to pursue a social enterprise merger or an acquisition.  Some of these include:

Social goals:

  • Create social impact faster
  • Export a successful model – e.g., Organization 2 adopts Organization 1’s model
  • Expand programmatic reach – e.g., to new geographies, new target populations
  • Improve programmatic outcomes e.g., Create or retain jobs for target population
  • Develop more effective voice and advocacy

Financial or operational goals:

  • Greater speed to market (geographical expansion or product line diversification)
  • Acquire underpriced assets
  • Integrate supply chain
  • Achieve efficiencies (reduce redundancies, improve processes/systems)
  • Access new funding sources (new donors, investors, customer segments)
  • Reduce overcapacity, fragmentation in market

Organizational learning goals:

  • Bring new or needed expertise in-house
  • Substitute for in-house research and development

Extenuating circumstances:

  • Address loss of funding sources, financial distress
  • Address leadership vacuum

Before pursuing social enterprise M&A, an organization needs to be clear on the purpose of the deal, particularly what the organization hopes to achieve (or thinks it will achieve) in the context of social enterprise.  This will inform what the organization needs to look for in a merger partner or a target acquisition.

In REDF’s experience, each strategy comes with pros and cons, particularly from a risk/reward standpoint.  For instance, if the priority is to create more social enterprise jobs through M&A, it is a comparatively lower-risk strategy than trying to increase speed to market, and the social returns are high.  However, the financial returns are relatively much lower.

 

Motivations for M&A: Do’s and Don’ts

For each social enterprise M&A strategy, REDF suggests some do’s/don’ts based on lessons learned from real-life mini-case examples below.  Each example illustrates the need to proceed armed with patience, expertise, and a healthy ability to tolerate risk.  Each example also highlights the potential pitfall of pursuing M&A for the wrong reasons.

 

M&A motivation: Create social impact faster

Example:

Social Ventures Australia creates a consortium of nonprofits called Goodstart to buy a struggling chain of 660 for-profit day cares and convert into early learning centers for disadvantaged children.

Do:

  • Have very clear goals and governance structure for a consortium-led acquisition.
  • Leverage the social mission as a way to win the deal and/or obtain favorable financing.

Don’t:

  • Waste time – speed and quick decision-making is of the essence.
  • Under-resource post-acquisition turnaround work, especially navigating differences between for-profit and nonprofit missions.

 

M&A motivation: Export or recreate a successful model

Example:

For-profit restaurant owner Andrew Stoloff buys Rubicon Bakery (which was a program run by nonprofit Rubicon Programs) and converts it into a for-profit B-Corporation.

Do:

  • Be explicit about what you think is transferable and why the target is a good vehicle for recreating success.
  • Structure a “try before you buy” if possible to test your assumptions about transferability.

Don’t:

  • Forget to identify why M&A is better than alternatives; do assess if replication or social franchising may be a less risky and expensive way to export models of success.

 

M&A motivation: Acquire underpriced assets

Example:

TROSA, a North Carolina nonprofit, buys up the moving license of a bankrupt small business to start its own moving company social enterprise. The license would have been difficult to obtain otherwise, because it requires approval from existing licensed companies.

Do:

  • Have a lot of experience operating the asset your are about to acquire.
  • Have a clearly articulable reason for why you think this asset is underpriced (e.g. bankruptcy).

Don’t:

  • Use this as a way to get into a new line of business.
  • Underestimate the investment needed to make the asset operational again. Do factor in working capital needs of the asset as part of your acquisition price assessment.

 

M&A motivation: Create or retain jobs for target population

Example:

In the wake of the closure of Youth Industries, a youth-focused SF nonprofit, its nonprofit social enterprises were kept alive through acquisition by other local nonprofits (e.g. New Door Ventures acquired bike shop Pedal Revolution).

Do:

  • Ensure alignment of social mission between old and new parent nonprofits (e.g. same target population, similar services).
  • Allow a transition period to minimize disruption for current SE employees.

Don’t:

  • Expect job creation or retention to be automatic – most M&A actually results in job losses. Post-merger job stability or growth requires care and attention.

 

M&A motivation: Attract more funding

Example:

Non-profit RealBenefits purchased by TriHealix, a for-profit healthcare IT company, for access to for-profit venture capital money to scale.

Do:

  • Have a business case for why the combined entity is a better investment than a portfolio of the two organizations.
  • Use the integration process to build out new systems for growth.

Don’t:

  • Expect legal entity changes alone to drive cultural and performance changes.

 

Conclusion

Mergers and acquisitions can be an effective option to achieve scale faster than organic growth alone. As we’ve discussed in this learning guide, there are different reasons an organization may want to pursue a social enterprise merger or an acquisition, and it is important that your social enterprise fully understands its goals in doing so. We hope this learning guide has provided you with those high-level considerations.

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