The Making of a Successful Merger

Jeremy Conaway
Integrated Plan Services Corporation

In an era of rethinking, restructuring, and reengineering, some organizations are reaching beyond mere redesign and are coupling with other like-minded adventurers to create new entities. Since 1993 NAR has approved 60 association mergers, and there are several more in the developmental and approval stages.

The reasons for merging associations are as broad as the process is deep. Regardless of the driving forces behind a merger, to be successful, associations need to exercise careful consideration of the organizational and legal aspects of the process.

Accountability Is Key
The ultimate goal of a merger is to create an association with a new culture of governance, management, operations, and service provisions. Therefore, the first, and perhaps the most important, merger consideration is accountability. You need to spell out the target goals of the merger and make sure all involved are held accountable for the final product.

If the merger is intended to reduce costs, you'll need to generate business plans and pro forma financial statements that spell out what needs to happen to reach the desired goals and objectives. If the objective is to provide cutting-edge member services, you'll need to evidence the feasibility and marketability of such services before entering into the merger process.

Makeup and Time Frame Make a Difference
The makeup of the merger design team and the process itself can play a large part in spelling success. employ an organizational architect who can exercise a wide range of creativity and innovation during the merger process. Then turn the process over to legal counsel who can effect the legal framework necessary for the completed design.

The makeup of the merger negotiation committee or task force will have a significant impact on the process. Most merger committees include too many individuals with undisclosed agendas. Those agendas often include soliciting positions of power within the new association. Because of that, it's beneficial to include only those individuals who've agreed not to take, or support anyone seeking, positions in the new association.

Keep the size of the committee small. Give committee members specific instructions and hold them accountable. These representatives should be completely empowered within the boundaries of the board motion that authorizes the merger negotiations.

Keep the time frame for the merger process short--allow just 8 to 10 weeks to accomplish all goals. A long, drawn-out process doesn't create a more complete result but rather increases ambush opportunities for dissenters and political power players.

Address for Success
Once the many social and cultural factors have been considered and the parties have elected to move into a merger feasibility phase, several key matters must be addressed.

--Financial considerations. Create a complete and accurate picture of the merging associations’ finances to project what resources will be available to the new association. Examine all financial obligations, real and potential financial liabilities, and the nature of any and all financial and physical assets. Then compare those results against the business plan and pro forma financial statements previously prepared for the new asso-ciation to determine which assets will be used by the new association and to plan for the liquidation of any unnecessary physical assets of the merging associations.

Also, pay special attention to what the merged association's finances will look like at the end of the financial year or on the target date of the merger--whichever occurs first. Carefully ascertain potential pension and other retirement obligations, since they can place a heavy financial burden on the new entity. Finally, the definitive merger agreement must include language that controls the financial affairs of all participating associations during the interim premerger period.

-- Classic legal considerations. Most associations are incorporated under one or more statutes within their respective state jurisdictions. As either a profit or a nonprofit corporation, each association participating in the merger process will undergo several significant legal changes. Each par-ticipating association's articles, bylaws, and other governing documents must be reviewed to determine the changes that will have to be made and by what process the amendments must be completed.

In the classic legal merger, one of the corporations becomes the surviving corporation. Or, in some cases, a new corporate shell is created for the surviving organization. This work will require the assistance of legal counsel.

Careful attention needs to be given to the termination provisions of any corporation that's being discontinued, as an improper asset distribution on termination can cause significant legal liabilities.

--Decisions regarding governance. Often, an intensely debated issue during the merger process is that of how the new association will be governed. The key to effective governance is macro management by policy and budget. Fashion a governing body that's appropriately sized (nine directors is optimum) and that includes individuals from a wide range of expertise. The most important aspect of the new governing body should be its ability to understand and contribute to providing state-of-the-art products, programs, and services.

--Definitive documents. Once the merger committee and the organizational architect have completed their discussions and agreement has been reached on the form of the new association, the parties will incorporate their vision into a definitive agreement. It should cover, for example, approval by the governing bodies, the timing of the transaction and the effective date of the merger, the disposition of staff resources, a business-as-usual provision, a description of the new entity and its governing documents, the disposition of any tax-related matters, the handling of memberships, all necessary state and National Association of Realtors® approvals, and the disposition of any MLS operations within the participating parties. The critical objective is to ensure that the draftsperson has protected and perpetuated the design envisioned by the merger committee and the organizational architect.

Mergers are one way to create a state-of-the-art Realtor® association capable of providing its members with products, programs, and services that'll maintain and build on their competitive position in tomorrow's real estate marketplace. Anything less is a waste of time.

Mr. Conaway lives in Traverse City (MI) and is president of Integrated Plan Services Corporation of Phoenix. He provides association consulting services in the areas of association reorganization, leadership, marketing, mergers, MLS operations, quality assurance programming, and business planning.

For Additional Information
Davis, Nancy M. Restructuring America's trade associations: mergers and acquisitions are fundamentally changing companies’ relationships with their trade associations. Association Management. Aug. 89:50–56.
Fellman, Steven John. Establish a “comfort level” when negotiating political issues for a successful merger. Association Trends. Jan. 10, 92:3, 6.
Forbes, Paul S. Mergers: look before you leap! Courtship necessary to ensure compatibility of merging associations. Association Trends. Jun. 26, 92:5.
Singer, Mark I. and Yankey, John A. Organizational metamorphosis: a study of eighteen nonprofit mergers, acquisitions, and consolidations. Nonprofit Management and Leadership. Summer 91:357–369.

Checklist for a Successful Merger
Preparing quality assurance checklists in advance of a merger can greatly increase the effectiveness of the process. The following checklist is from the California Association of Realtors®’ Legal department. Each item on the checklist represents a matter to be reviewed, researched, and incorporated into the merger process.

Corporate Documents
1. Articles of incorporation and certification by secretary of state
A. Boards/associations
B. MLS corporations
2. Bylaws
3. MLS rules
4. Minutes of governing board meetings
5. Financial statements
6. Real property
7. NAR approval
8. Tax-exempt status
9. Tax issues
10. Contracts
11. Employment and consulting agreements
12. Loan agreements
13. Pension and profit-sharing plans, deferred compensation plans (401k), and 125 plans
14. Welfare benefit plans
15. Personnel handbook or policy manual
16. Insurance contracts

Key Information from the Company's Management
17. Financial analysis
18. Potential defaults under existing contracts or potential litigation
19. Product backlogs, purchasing inventory, and pricing policies

Key Information from Outside Sources
20. Pending negotiations for the purchase or disposition of assets or liens of real property
21. Absence of defaults from principal lenders and lessors
22. Absence of liens or judgments, the searches of public records
23. Certificates of good standing from secretary of state
24. Title search and acquisition of title insurance
25. Appraisal of company-owned real property

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