Introduction

One option for achieving scale faster than organic growth is through mergers and acquisitions. 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.

The way an organization decides to structure and pursue social enterprise M&A will be very different depending on whether it is a merger or an acquisition, as well as the legal structure of both organizations.  Outlined below are some of the permutations of legal structures and types of partnership for social enterprise M&A, and a few considerations for each.

 

Options for Mergers

 

You will need to consider the following:

• Legally, just like any other nonprofit merger – a new nonprofit is formed.
• Assets, liabilities, and operations of both nonprofits combined.
• Need to decide what happens to the social enterprise’s operations and branding – whether and how to continue it as a business.

 

 

 

You will need to consider the following:

• This is less common – usually happens as an acquisition.
• Need to decide legal structure of new entity (for-profit or nonprofit) and resulting governance structure.
• Need to agree upon valuation of for-profit social enterprise.
• Need to consider whether for-profit social enterprise income triggers UBIT (unrelated business income tax).
• Need to decide what happens to the social enterprise (whether it stays intact and in what form), especially the social mission aspect.

 

 

 

You will need to consider the following:

• Legally, this is just like any other for-profit merger – a new business entity is formed, and assets, liabilities, and operations of both businesses combined.
• Need to decide what happens to the social enterprise (whether it stays intact and in what form), especially the social mission aspect.

 

Options for Acquisitions

You will need to consider the following:

• Legally, this is just like any other nonprofit acquisition – the parent nonprofit assumes control and takes on the nonprofit social enterprise’s assets and liabilities.
• Need to decide what happens to social enterprise’s mission, operations, and branding.

 

 

You will need to consider the following:

• For-profit social enterprise’s assets and liabilities need to be valued.
• Nonprofit needs to be financially able to acquire the for-profit (at fair market value).
• Need to decide legal structure of acquired for-profit social enterprise, and how closely held it will be by the nonprofit parent. For example:
  • The social enterprise can remain as a for-profit subsidiary if wholly owned, but need to safeguard against private inurement (nonprofit is improperly benefiting for-profit).
  • Social enterprise can become a nonprofit subsidiary but need to consider UBIT (unrelated business income) implications
• Need to decide what happens to social enterprise’s mission, operations, and branding.

 

 

You will need to consider the following:

• Legally, just like any other for-profit acquisition, including valuation and purchase items.
• Need to decide what happens to social enterprise’s mission, operations, and branding.

 

 

 

You will need to consider the following:

• Uncommon; usually nonprofit becomes a corporate foundation within the for-profit (otherwise a for-profit cannot technically have a nonprofit subsidiary).
• Or, the social enterprise becomes a for-profit subsidiary of the parent company (need to consider tax implications).
• Need to decide what happens to social enterprise’s mission, operations, and branding.

 

Conclusion

The way an organization decides to structure and pursue social enterprise M&A will be very different depending on whether it is a merger or an acquisition, as well as the legal structure of both organizations. We hope this learning guide has clarified some of the permutations of legal structures and types of partnership for social enterprise M&A, and a few considerations for each.