Understand your bottom line

Poor financial planning derails mergers. Productive early discussions are built on the principle of ‘no surprises’. That is, you need to be transparent about all aspects of your organisation from the outset. To ensure maximum transparency, you need to have done the preparation.

It is to your advantage to identify financial issues well ahead of merger negotiations, for two reasons. First, if an issue is identified well enough in advance, you may have an opportunity to implement strategies to address it before seeking a merger. Second, if an issue is discovered during the due diligence process, it may unsettle your merger partner, and undermine the trust required to execute a merger agreement successfully.

If there is considerable uncertainty surrounding your financial assessment the decision whether to pursue (or not to pursue) a merger partner should be delayed. Typically, the party in the stronger financial position leads negotiations, but in the NFP sector, until legal agreements are signed, either party can pull out of the merger process. Battle for control of the process is therefore unproductive. In reality, the party with the stronger financial position will be in a better position to maintain its culture, staff and identity through the merger process. Understanding and recognising this dynamic in advance allows the smaller party to appreciate what they have to offer and ensure that this is reflected throughout the negotiations.

Financial Performance

Examine your annual reports and audited financial statements for at least the last three years. Try to gauge trends across these three years in terms of:

  1. Major categories of income and expenditure
  2. Assets
  3. Liabilities
  4. Investment (if applicable)
  5. Debt reduction (if applicable)
  6. Client/tenant revenue or expenses
  7. Cash flow
  8. Unplanned financial adjustments

Your financial trajectory will be a crucial input to merger discussions, and insights from trends help you determine future financial pressure points. Consider seeking advice of accountants where you do not have sufficient internal expertise, or your financial circumstances are particularly complex.


Please feel free to leave questions or comments on this part of the merger toolkit.