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Protecting your Organization when Entering into Collaborative Arrangements

Steven P. Feimster, CPA
Steven P. Feimster, CPA Director, Audit & Accounting, Manufacturing & Distribution Industry Group Leader, ESOP Specialty Area Leader

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Collaborations with other organizations can be extremely beneficial to your organization when done properly. From formal mergers and acquisitions to informal partnerships, they can help you fix your weaknesses, expand on your strengths, or grow your mission into new geographical markets or programs.

Collaborations are never an easy task; they often take months of due diligence, internal and shared meetings, and work by lawyers, accountants, and other advisors – and there is certainly a cost to all of this. Before diving headfirst into an alliance, it’s important to have open and frank discussions with the other party to lay out what each side wants to accomplish. What does your organization want to gain from this?  What does the other party want to gain from this? The answers to these two questions often aren’t the same, and they often shouldn’t be, since each party usually wants to benefit from the other’s strength, while leveraging their own.

The goal of these preliminary meetings is to 1) make it clear what each organization views as a successful collaboration, and 2) determine whether a collaboration can accomplish both sides’ goals. If it doesn’t, chances are it won’t be a long-lasting partnership.

But let’s assume these preliminary meetings are a success. What happens next? As the structure of the relationship begins to take shape over the next several months, it’s important to keep these items in mind as you continue in the process:

  • Keep your mission in mind. Minor deviations from your organization’s mission are often a necessary means to have the financial capability to support the overall mission. It’s important, however, to be mindful of Unrelated Business Income Tax (UBIT) rules to determine whether the activities of your newly formed collaboration trigger an income tax liability for not being substantially related to your organization’s exempt status.  Keep your tax advisor abreast of any new developments along the way, so they can advise you on any potential tax risk.
  • Don’t overlook the other party’s financial/community condition. Organizations are often eager to jump into collaborations because the outcomes can be hugely successful. It’s important to also look at worst-case scenarios, and what can go wrong. What liabilities is your organization taking on, and are there any indemnification clauses? If you partner with a struggling organization, what is your exposure if the partner organization fails? Conversely, if the other party has had negative feedback from the community, what is your brand exposure by partnering with them?
  • Know your limits. Be careful not to over-extend your core business for the sake of the partnership. As the collaboration continues to progress, keep an eye on your existing programs to make sure enough resources are still going to them to allow them to run effectively and efficiently. This includes administrative time, financial resources, and most importantly, human resources. If your employees are being stretched too thin, you may need to investigate re-allocating and potentially hiring people, which needs to be evaluated when assessing the cost-effectiveness of the collaboration. Also, make sure there’s a clear path for employees to share any concerns. Lastly, know what steps are needed to exit the partnership before the time comes to do so.

Though collaborations require a lot of work, they can be extremely advantageous if done carefully and strategically. The steps above can be used as guidelines to help protect your organization when entering into a collaborative arrangement.

Steven P. Feimster can be reached at Email or 215.441.4600.

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Steven P. Feimster, CPA

Steven P. Feimster, CPA

Director, Audit & Accounting, Manufacturing & Distribution Industry Group Leader, ESOP Specialty Area Leader

Manufacturing & Distribution Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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