Fiscal Sponsorship as a Nonprofit Merger Alternative

In the ED Forum, TSNE’s Executive Director Jonathan Spack reflects on issues facing nonprofit organizations. He invites your response to his columns. Please email info@tsne.org to share your thoughts on this month’s issue.

One result of the current economic situation is that many nonprofit organizations, especially smaller ones or those dependent on public funding and/or a small number of private donors, are in difficult financial straits. Some of these groups are beginning to consider an option that has previously been anathema to many – merging.

Nonprofits have traditionally viewed mergers with a great deal of trepidation, and for good reason: they’re time-consuming, stressful, costly and not always successful. The purpose of this article is to outline a quicker, less-conflictual and far less expensive alternative: transition to fiscal sponsorship on either a temporary or ongoing basis.

The Problem with Nonprofit Mergers

• They’re expensive! Formally combining two nonprofit corporations requires a great deal of technical expertise, which means paying for high priced consultants, accountants, lawyers, etc. These costs can easily run into the tens of thousands of dollars, sometimes much more.
• Because of the complexity involved, not to mention negotiations over identity, governance and finances, they take a long time, often a VERY long time.
• Merging boards and staff is a difficult and sensitive issue, one that frequently causes negotiations to break down entirely.
• Unless the missions are identical (a rare event), there is inevitably conflict over future strategic and programmatic direction and goals, another potential deal-breaker.
• More often than not, a “merger” is really an acquisition by a stronger organization of a weaker one, which can result in serious staff morale problems.
• Although efficiency and consolidation of services is usually the goal, the outcome may compromise the mission of one of the organizations and shortchange its constituents.

Why Fiscal Sponsorship is Preferable to Merger in Some Cases

• It’s a much faster process. The technical requirements and potential points of conflict are far fewer, which means that once there is agreement in principle to make the transition, an organization can begin operating officially under fiscal sponsorship in a relatively short time. Wrapping up the details of the operational transition will take longer but still far less time than a merger.
• It’s much less costly, as outside consultants, accountants and attorneys aren’t usually needed.
• There are no turf issues because the sponsor recognizes the programmatic expertise of the sponsored organization and does not seek to control, but rather to support it.
• There are no battles over assets or programmatic control or direction, as the nature of fiscal sponsorship dictates that the sponsored project retains control of its funds and its programs.
• There is no “culture clash” or need to merge boards and staff, thus greatly reducing stress on leadership and staff.
• The organization retains its own identity (including its website and materials) and can retain its corporate and 501(c)3 status against the day it resumes independent operations.
• The mission of the organization is preserved and its constituents continue to benefit.

What’s Required for a Fiscal Sponsorship Transition?

First of all, for IRS purposes there must be a mission match between the sponsor and sponsored group. Fiscal sponsors typically have other intake criteria as well, such as effective in-place leadership, the existence of a sound fundraising or strategic plan, future funding commitments sufficient to continue core operations, and no significant outstanding liabilities or active litigation.

How Long Does it Take?

From initial discussions through due diligence, transition planning and functional transfer, the new arrangement can be up and running in as little as two months if all goes smoothly. Tidying up all the paperwork may take longer but those technical steps don’t need to hold up the transition.

What Does It Cost?

The primary costs will be in the form of staff time for both organizations.

Next Steps

So if your nonprofit is facing budget reductions, staffing cutbacks and the loss of basic administrative capacity, consider the fiscal sponsorship option. It may prove to be a painless way to preserve your core mission and programs until the economy revives. For more information about TSNE’s Fiscal Sponsorship program, contact Kay Snowden at 617.523.6565. 

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