Nonprofit Mergers Part 3: Due Diligence and Decision-Making: What to Evaluate Before You Sign an Agreement
Once two organizations agree there may be a strong fit, the next step is one of the most important: due diligence.
This is where enthusiasm meets reality. Successful mergers depend on honest, thorough evaluation of financials, governance, culture, and risk. Skipping or rushing this phase can turn good intentions into lasting complications.
In this third installment of the Navigating Nonprofit Mergers series, we outline what nonprofit leaders and boards must evaluate before making a merger official, including a detailed checklist, risk review, and best-practice recommendations.
1. What Is Due Diligence, and Why It Matters
Due diligence is the structured process of verifying facts, assessing risk, and confirming that both organizations share the readiness and integrity to merge.
It goes far beyond reviewing spreadsheets. True diligence examines the systems, culture, and values that drive each organization.
Purpose of Due Diligence:
• Identify liabilities or compliance gaps
• Clarify governance and leadership structures
• Assess cultural and operational compatibility
• Protect stakeholders and preserve trust
• Build a realistic post-merger integration plan
2. Core Areas of Evaluation
Financial Health
- Review audited financial statements (3 years minimum)
- Verify restricted funds, endowments, and outstanding debts
- Evaluate cash flow, reserves, and sustainability metrics
Legal & Compliance
- Examine bylaws, articles of incorporation, and contracts
- Check licensing, insurance, and pending litigation
- Confirm compliance with state, IRS, and grant requirements
Programs & Operations
- Assess program overlap, quality, and performance data
- Identify service redundancies or potential integration challenges
- Evaluate IT, HR, and operational infrastructure
Governance & Leadership
- Review board composition, term limits, and governance practices
- Evaluate CEO/Executive Director compatibility
- Assess alignment of leadership style and decision-making processes
Culture & Communication
- Conduct interviews or surveys across staff levels
- Evaluate transparency, inclusivity, and trust levels
- Understand how each organization manages conflict and change
3. Due Diligence Checklist
Category
Key Questions
Complete Notes
Financial
Are audits clean and current? Are there liabilities or contingent debts?
Legal
Are there pending legal issues or compliance
violations?
Governance
How will board composition change post-merger?
Programs
Are services complementary or duplicative?
H&R Staffing
What positions overlap or require redefinition?
Culture
How similar are organizational values and communication norms?
Funders
Have key funders been briefed or consulted?
Reputation
How is each organization perceived in the community?
IT & Operations
Are data systems compatible or easily integrated?
Tip: Assign a due diligence lead or small task-force including finance, HR, and legal expertise to track findings and report to both boards.
4. Common Risks and Pitfalls
⚠️ Unequal Financial Positions: One partner’s instability can create power imbalance.
⚠️ Hidden Liabilities: Deferred maintenance, unfunded pension obligations, or pending lawsuits.
⚠️ Governance Conflicts: Mismatched expectations about board control and structure.
⚠️ Cultural Clash: Differing leadership philosophies or decision-making norms.
⚠️ Donor Resistance: Loss of confidence if communication is poorly managed.
These risks don’t necessarily stop a merger, but ignoring them will.
5. Recommendations for Strong Due Diligence
✅ Use Third-Party Experts
Bring in legal, accounting, and merger-strategy advisors to ensure impartiality.
✅ Create a Shared Data Room
Securely organize financials, governance docs, HR data, and contracts for both organizations.
✅ Document Assumptions and Deal Breakers
Record key thresholds: minimum cash reserves, debt limits, or staffing non-negotiables.
✅ Establish a Decision Timeline
Agree on milestones: information gathering, analysis, board decision, and communication plan.
✅ Prioritize Transparency
Keep staff, funders, and key partners informed of progress at appropriate intervals.
6. Key Decision: Structure and Control
By the end of due diligence, leaders must decide:
- Will it be a true merger (equal entities forming a new organization)?
- Or an acquisition (one organization absorbing the other)?
- How will governance, leadership, and brand identity evolve?
7. Sample Decision Matrix
Decision
Area
Option A (Full Merger)
Option B (Acquisition)
Option C (Shared Services Partnership)
Notes
Governance
New joint board formed
Absorbing board retains control
Boards remain separate with MOU
Branding
New name & identity
New joint board formed
Co-branded initiatives
Leadership
Co-CEOs or new ED
Current CEO retains role
Shared executive functions
Financial
Fully integrated
Partial integration
Shared back-office only
This tool helps boards weigh trade-offs between control, risk, and mission focus.
8. Closing Thought: Diligence Builds Trust
Due diligence isn’t about finding reasons not to merge, it’s about ensuring that what you build together is sustainable, transparent, and mission-aligned.
Strong diligence builds confidence among staff, funders, and communities. It lays the groundwork for integration and success long after the paperwork is signed.
At Glick Davis, we guide nonprofits through due diligence and decision-making with structure, neutrality, and a focus on long-term impact.
Previous in the Series:
Part 2: Finding the Right Partner: How to Identify and Approach Potential Merger Opportunities
Next in the Series:
Part 4: Integration and Communication: Turning a Merger Plan into a Unified Organization
Navigating Nonprofit Mergers Blog Series
Nonprofit Turnaround: A Guide for Nonprofit Leaders, Consultants and Funders
