Firsthand Reflections & Lessons On A Nonprofit Acquisition

This post was originally published by Community Credit Lab, which is now part of Common Future.

Three years ago, Rodney Foxworth, CEO of Common Future (CF), read an article that we wrote in SSIR about the tension we were feeling as Co-Founders of Community Credit Lab (CCL) between scale and systems change. From there, our organizations began to collaborate to design and facilitate affordable, equitable, community investments together.

That article led to a growing professional, strategic, and thought partnership between our two organizations, including an advisory relationship with CF’s Director of Revenue, Rakiba Kibria, and programmatic partnership with CF’s Director of Capital Strategies, Eric Horvath. This programmatic partnership brought three new lending programs and lending partners to the table and we were grateful to have the opportunity to design in relationship with Native Women Lead, ConnectUP! Institute, and MORTAR, and ultimately facilitate capital to BIPOC-owned small businesses across the country in partnership with additional organizations, including Equitable Food Oriented Development and New Majority Capital.

Little did we know, that article and initial introduction would ultimately lead to an acquisition of CCL by Common Future to expand our partnership and collective efforts together. This acquisition took place in late September 2022, and, as these types of collaborations and integrations are (too) rare in the nonprofit sector, we wanted to take a moment to reflect on this experience with the goal to inform the wider ecosystem and ultimately enable others to consider nonprofit mergers and acquisitions.

Below, we offer what we felt was essential to have in place as an organization to assess an acquisition deliberately and with relative speed, the challenges we navigated, successes we celebrated, and lessons we learned as a nonprofit organization understanding what an acquisition meant for our team, partners, and various stakeholders.

Building Blocks

Firstly, we were grateful to have put the following in place and would recommend an examination of these components prior to exploring an acquisition or merger opportunity:

• Clear Understanding of Vision / Mission: As a start-up nonprofit, we turned to our mission and vision with every strategic decision to ensure that we were not losing sight of why and for whom we exist. We also made sure to revisit our mission and vision annually with the team and with feedback from our partners to understand how we might need to evolve based on changing contexts and conditions. Having our mission and vision present at CCL enabled us to understand if and when there was alignment with other organizations and how we could be additive (or takeaway) from the mission of others.
• Clear Understanding of Organizational Culture: From inception, we have tried to be intentional about the culture that we wanted to cultivate at CCL. In the beginning, we turned to resources like Harvard Business Review’s guide to corporate culture to set the baseline style that was a right fit for where we were in our organizational growth and who we were as people showing up for the mission of CCL. With team growth came reinforcement of this culture from our recruitment process to onboarding materials, to how we interacted with each other and our partners and borrowers daily. Having this strong foundation allowed us to understand if we would be a good cultural fit with Common Future, another organization focused on a culture of purpose, learning, and results.
• Clarity on Roles: Ensuring our team members understood their roles and associated responsibilities within the organization was essential and we revisited it quarterly. As a start-up nonprofit with a few team members, it is easy to have responsibilities add up and lose alignment with roles. Quarterly recalibrations enabled us to build the muscle of responsibility as new tasks came through – and when the opportunity for the acquisition arose it was easy to understand who was responsible for which parts of the process, avoiding confusion and unnecessary or duplicative work.
• Process / Workflow /Task Mapping: as a team, we spent a lot of time mapping out our workflows, tasks, and processes using tools like Airtable and Notion. This mapping and clear understanding of who does what at any given moment allowed us to pivot and adjust quickly when we needed to create capacity related to the acquisition.
• Document Organization: this sounds simple, but ensuring documents were in the right folders and places was essential to shorten diligence response times. Sometimes the little things make a big difference.
• Updating Databases: ensuring our databases were up-to-date for all grants, investments, and lending activity meant that we were well prepared to transfer this information and respond to questions as they arose.
• Timeliness of Financials: ensuring our operating projections, investment projections, budget and expense reporting, as well as our monthly, quarterly, and annual financials were up to date (and could continue to be updated throughout the process) was absolutely necessary.
• Governance: maintaining up to date minutes, formation docs, 990 filings, and insurance coverage all were essential to being prepared. Again, this may sound simple, but anyone who’s started or worked for a small organization knows that it’s easier said than done.

All of this mattered as it allowed us to have a strong understanding of who we were as an organization and be able to clearly articulate that to others. This served us well during the diligence process as we were able to be highly responsive to questions and requests for information about CCL. Ultimately, this kept us on track for the timeline we had set internally and was essential to keep the process moving forward.

The Decision to Move Forward

The opportunity to be acquired was exciting, but we needed to figure out how to make the decision to move forward and understand the potential to join organizations. We took a few first steps to make the go/no-go decision and understand what it would mean to undertake this process in full with support from others.

• Researching common challenges and stories from organizations that have undergone similar transitions: who’s done this already and how did it turn out? The main learnings here were to focus on mission and culture and not to underestimate the amount of capacity that acquisitions and mergers require.
• Assessing mission and organizational culture alignment: we spent a lot of time reflecting on the interactions we’d had and what we could interpret about CF’s organizational culture and mission alignment based on these interactions. We then reflected on the level of alignment between CCL’s current culture and CCL’s mission. After this, we had an open discussion with CF’s leadership about where their culture was currently and where they wanted it to go over time.
• Assessing capacity: Did we have the internal capacity to navigate the acquisition process? We had realistic discussions about what would need to be deprioritized to take on the additional work and if this was the right time to make these shifts. Once we decided to move forward and what would need to change, we also communicated these changes across the team to avoid misaligned expectations.

Having transparent conversations with our Board, Team, and Common Future’s leadership was key to making informed decisions possible. The feedback shared during this stage helped us stay anchored through the process – we were able to check in on whether alignment remained through conversations and reprioritize to adjust to capacity needs throughout the negotiation and closing process.

Negotiation Dance

The next couple of months were what we called “the negotiation dance”. In each conversation, new information was revealed on both sides and as a leadership team, we needed to continually re-evaluate what we saw as strategic to address at the current point in time versus what we could figure out later. This felt especially difficult in the nonprofit context when we are trying to center the mission; but also the reality of team job security, role alignment, benefits, and compensation is equally important. Holding this tension was not easy and it involved a lot of internal conversations to reset on the priorities for every conversation we had with CF, organized documentation to make sure we were getting answers to the questions outstanding, and transparency and vulnerability with the team about this tension.

Simultaneously, we were learning what the acquisition process looked like – when did we need to receive a Letter of Intent and what should it say, when should we share diligence materials, what diligence materials can we ask for as the organization being acquired, when should we involve lawyers and what do we need to communicate to who and when. We were thankful to have a Board Member who had legal expertise and navigated mergers and acquisitions previously to help guide us. And what we learned from our experience and others along the way is that no process is the same. While there are “best practices” out there – the process needs to reflect the people involved and the complexity of the transaction.

The process needs to reflect the people involved and the complexity of the transaction.

Structuring the Exit

Once the strategic fit was confirmed, the discussions during the negotiation dance moved to how to operationalize in a way that reflected the strategic intention of the combination. We explored the most effective legal structure, how to structure the team, when to transition the team, how to account for sweat equity in a non-profit context, and how to communicate this organizational transition externally.

• Legal Structure: Understanding first the need for the acquiring entity’s legal structure to continue existing was critical. In CCL’s case, as an investment entity, that has long-term obligations as well as regulatory considerations, it was important to keep our entity. Next, it was important for us to understand what were the considerations we would need to keep in mind to enable the sustainability of both organizations. Finally, with the key considerations in mind, we could examine the legal structures and entities of both organizations to figure out how we should structure CCL’s legal entity within the CF entity, with support from CF’s counsel and CCL’s pro-bono counsel. We explored merging subsidiary entities, adding a subsidiary entity, and ultimately decided on an affiliated entity structure. This achieved the goal of keeping the CCL entity, while also keeping investment related assets and liabilities ringfenced.
• Team Structure: With four new team members coming into Common Future, we had to think about what was most strategic for us: to sit together as a new department within Common Future or for us to integrate across the divisions of Common Future. If we stayed together, it would be easy to continue the work of CCL, but we might be siloed from the other activities at CF and not able to see the opportunities for collaboration and partnership. If we spread across the organization, we would be able to feel integrated into the team, but it may mean that CCL’s existing work would evolve and potentially change. Integrating across CF’s team enabled us to find and eliminate operational overlaps and gaps – to build a stronger combined organization.
• Coordinating on HR considerations: simple things like what should the end date of the contract with CCL be and the start date of contracts with CF were integral to a successful combination. For example, determining an end date in early October allowed CCL team members to keep health, dental, and vision insurance while waiting for new plans to begin at CF in November. Complex considerations like whether to provide a bonus to CCL team members, given that our PTO policy was unlimited and team members had been working tirelessly across different time horizons, were more nuanced. Ultimately, we decided that a bonus structure of 1% x current salary x number of months worked at CCL would be an equitable solution, given that the calculation would be based on recent performance-based pay increases (i.e. salary), time spent at CCL (“sweat equity” in a for-profit context) and a uniform percentage across the team.
• Communicating the Transition: since day one at CCL, we’ve known that language matters and our goal from the outset was to have this arrangement framed explicitly as an acquisition since our research and experience had led us to believe that nonprofit mergers can often be ambiguous and misleading. Given the structure of the arrangement and the fact that CF was deliberately bringing in CCL to provide a specific function in-house, we felt strongly that communication aspects should be clear around the framing of “acquisition, not merger”, both internally and externally to funders, investors, partners, and the wider ecosystem. We also felt that the framing of acquisition best acknowledged the efforts of the wider team in CCL’s start-up phase over the first three years. When and how to communicate this news was a complex project that required collaboration and coordination across CCL and CF’s development and communication teams.

If we were pursuing this opportunity to be acquired, it was to partner together – to find new ways to amplify the solutions of the communities we serve.

It took a lot of conversations, trial, and error to get to where we landed across all these areas, but the key was our willingness to continue revisiting if this operational decision was aligned with our strategic intentions.

Room for Improvement

Reflecting on this process, there were a few things we could have done differently or approached with more intention. If we were to do it again, we would rethink or evaluate timing, capacity, and communication.

• Capacity Constraints: While we did our research in advance and tried to recognize the flags about team capacity during an integration process, we underestimated the amount that this transition would affect the team in its entirety in advance of the integration. We tried to open up time and capacity so that we could focus on the integration, but this also meant that other full-time team members and consultants had to shoulder the weight of additional work during this time frame.
• Sensitivity for Recipients of the News: before we knew about the acquisition opportunity, we had scheduled an onsite and Board Meeting over a period of three days. The original agenda included Board Members participating in all three days and the focus was on team building, mission /vision alignment, and setting CCL’s strategic pillars for the future. While this work positioned us for successful integration at CCL, we underestimated the emotional aspects of this when the final day’s Board Meeting necessitated the update that CCL had been approached for an acquisition that would require the resignation of current Board Members. Simply put, we spent three days asking for board members’ time and to be in relationship with them, and on the third day, the request was to wind down the board. This tension was likely felt more by us as managers than Board Members, but if we had the opportunity to do it again – we’d think more critically about the scheduling. As we got closer to finalizing the acquisition, we also had to inform advisors and key stakeholders, which felt challenging in a remote context. These are individuals who have provided strategic guidance and thought partnership to CCL for many years and if we could have, we would have shared this news in person rather than via email.
• Sticking to a Timeline: We dubbed it “Project 90 Days” as the goal was to complete the acquisition within 90 days after the first offer was made. At one point in the process, there was the potential to delay the integration by up to 3 months, essentially doubling this timeline. This would have been extremely difficult for us as a small organization trying to manage uncertainty related to the acquisition, maintain current work and projects, as well as think expansively about the future. By sticking to the original timeline, our team was able to always “see the light” at the end of the tunnel with a firm end date and start date as a primary goal. While we ultimately did stick to the timeline, the period where this was up in the air was likely the most stressful point for our team, especially given the uncertainty around new jobs and functions that the acquisition brought. If we were to do it again, we’d aim to stick to the timeline or have clarity on what factors absolutely necessitated a potential timeline adjustment when considering a change.

Key Successes

Having gone through the process, we felt that while there were many challenges, there were some things that were critical to the success of this transition.

• Transparency with the Team: We knew that transparency would be challenging and that the decision to be open with the team might lead to turnover or performance challenges (one person did decide to leave the organization). Ultimately, we decided to be open since we knew this is what we would prefer as employees and we had felt what it was like to not have this transparency elsewhere. By leaving room for the time to process, question, and live in the ambiguity together, we were ultimately able to solidify the bond we had as a team before integration. We scheduled weekly meetings without an agenda other than questions, concerns, or excitement about the acquisition opportunities. This allowed for open communication that didn’t feel one directional or like we needed to have all the answers – it also allowed us to think more about questions and the enthusiasm we had as managers. We know this was more feasible for us given that our team size was small, but where possible, building room for processing, aligning, and holding questions felt necessary.
• Trust from Governance: without an extensive amount of trust and positive rapport with CCL’s board, this process would have been much more difficult. As management, we did our best to keep the board informed and connected to CF’s leadership (i.e. by holding an introductory conversation with CF’s CEO, Rodney Foxworth). Ultimately, this trust felt unanimous along the way and while there was some grief at the loss of control of CCL (mainly by us as managers), the Board was extremely supportive and prepared to resign at the end of the journey together.
• Support from Partners: as with all decisions since inception, we’ve tried to rely on guidance from our community partners. Thankfully, we had Common Future’s support to discuss this potential opportunity openly with our partners and hear from them about what they thought, as well as any questions and concerns they might have about how it could affect our working relationship. This feedback and support allowed us to ensure we were continuing to design with our partners and borrowers at the core of our work and mission.

As we continue integrating into the CF team, we are grateful for the recognition that this acquisition was an acquisition of assets / brand / and people. CCL was in the best financial position since inception and we are glad to have been able to contribute to the ongoing operating costs of the team as we integrated into CF and to have the opportunity to think expansively about new investment initiatives with CF / CCL combined resources, development, and communications expertise going forward. We’re also grateful for the fact that CF has been able to provide the following key support functions since the effective date of the acquisition.

Key Support From Acquiring Organizations:

While much of the below might seem intuitive, it’s truly worth stating and repeating that the following has been essential to effective integration and should be requirements in a checklist from an acquiring organization to double-check the capacity of these functions and plan accordingly.

• HR / People Ops support: from new job descriptions and contracts to onboarding, to everything in between, CF’s People Ops team has been essential to ensuring a successful integration. Group onboarding and integration require a lot of work and this team has shown up for us since our first conversations. Tools like Slack’s donut app integration have supported us to meet people outside of our new teams – and feel like we’re part of an organization that collaborates together.
• Legal support: legal work has only increased post acquisition given that we now need to continue updating and refining templates and processes, and navigating regulations under a new structure between related, but distinct entities. CF’s in-house counsel as well as ongoing pro bono support from two firms, Orrick and Perkins Coie, has been essential.
• Finance / Accounting support: similar to legal support, finance and accounting needs have also increased as we begin to plan for a joint audit and financial reporting together with CF’s Finance team that was already in place. CF’s finance team integrated us immediately into the FY 2023 budgeting process and we began collaborating on accounting consolidation and reporting needs immediately together. Our Fractional CFO, Christina from Profit Reimagined, continues to play an essential role here, as does our outsourced lending and servicing team support contracted through Social Enterprise Economic Development via Ernst & Young Costa Rica.
• Operations & Systems support: CF’s Systems Lead and Operations team have been readily available to navigate integration between entities and think about where firewalls and compliance protocols need to be implemented to ensure CCL remains compliant with federal regulations, state regulations, and internal policies.
• Compliance support: we made the decision to ramp up CCL’s compliance support post-acquisition and our contracting with an outside audit firm to play the role of Outsourced Compliance Officer. This engagement will enable us to continue improving CCL’s compliance.
• Project Management support: CF’s Director of Special Projects continues to closely monitor items that were discussed along the way where we “put a pin it for post- acquisition”. This follow-up has supported us to ensure we keep closing the loop and making firm decisions that will support an effective integration over the long term.
• Revenue & Comms collaboration – migrating a network of funders, investors, and donors is no small feat and CF’s revenue and comms teams have been essential to thinking through which aspects should remain at the CCL level for now, and which can be migrated. The current decision is that donations and grants for operating costs will flow via CF’s entity and impact investments and funding for joint CF / CCL investment initiatives will flow via CCL. This breakdown allowed us to clearly communicate to CCL’s growing network about where resources would be allocated in the future and how resources could be best placed going forward.

Conversations that come from a place of expansiveness continue to unfold on a daily basis – what is possible when we work together and innovate as one?

Overall, this experience has been extremely energizing, mostly because of our new colleagues. As we move towards day 120, the ability to meet together in person with Common Future’s Executive Team and across divisional units has prepared us well to begin navigating the nuances of a larger organization effectively.

Moving forward, we are excited by the potential of bold actions like strategically aligned mergers, acquisitions, and partnerships (both formal and informal) to build pathways toward collective action across our sector. Alone, we can only do so much to shift the systems that we seek to change. Together, we can use the strength of our collective power and make room for our multiple approaches to define and co-create the future we want to live in.

What possibilities this joint future holds is ours to uncover and share – one thing we know for sure is that we are excited to be defining our Common Future together!