What Our Founder Learned From His First Nonprofit Merger

Mergers in the nonprofit sector are often complex, emotionally charged, and full of unexpected turns. For our founder, David La Piana, his first experience with a nonprofit merger in the 1980s wasn’t just formative; it was a crash course in organizational dynamics, board politics, and the hard realities of preserving mission-driven services under pressure.

In this personal reflection, David shares the true story of his attempt to merge the organization he led, East Bay Agency for Children (EBAC), with another small nonprofit. The story highlights how even the most well-intentioned efforts can be derailed by fear, miscommunication, and institutional resistance, but also how persistence and adaptability can eventually lead to lasting impact.

What follows is a candid, detailed account of that first merger experience, and the key lessons he has carried forward into decades of guiding others through similar transitions.

In the 1980s, a small nonprofit known as PCC was operating in Oakland, California. PCC provided day treatment services for preschoolers with special needs as well as an outpatient counseling program for children and families. Its major sources of income were a county Medi‑Cal (Medicaid) contract for the day treatment program and fee-for-service Medi-Cal for the outpatient services. PCC also owned a building.

Not unlike other small mental health agencies, PCC had deficits, staff/board conflicts, and leadership turnover. Ultimately, PCC’s executive director resigned. After he left, we met to discuss PCC’s future, which was uncertain at best. At the time, I directed East Bay Agency for Children (EBAC), and PCC’s services filled a niche for us. I suggested a merger between PCC and my organization as a way to preserve PCC’s services.

Through a circuitous route redolent with conspiratorial overtones, including a talk with a third-party intermediary on an airplane bound for Los Angeles, the subject of merger was broached with PCC’s board. Early discussions were somewhat difficult, as PCC’s board was divided on whether to proceed. The trustees also had widely varying knowledge about the issues PCC faced.

The most difficult issue was the population served by PCC. Their county funding source (the mental health department) was limited to serving children with emotional disturbances. Over the years, however, PCC had evolved to primarily serve children with developmental disabilities. The organization was very skilled in this area and did a great job with the kids. To PCC, the difference between emotional disturbance and developmental disability was small. It was no fine point to the county, however, and I noted the discrepancy between the population and the funding guidelines to the merger negotiating team early in the process.

The negotiating committee was made up of management and trustees from both agencies, and the reaction was quick. Before we could even properly begin “negotiations,” members of the PCC board who were opposed to a merger inflamed parents of the children in the day treatment program with threats that EBAC was planning to close down their program. A mob of angry parents descended on PCC’s next board meeting, and the situation deteriorated.

The PCC Board faction’s guerilla action succeeded, and EBAC backed off. That might have been the end of it. Unfortunately, however, the activist PCC trustees went a step too far. Fearing an attempt at a “hostile takeover,” and not understanding the legal impossibility of this maneuver in a nonprofit organization, they called their funding source (the county mental health director), and said, essentially, “Don’t let EBAC take us over and make us stop serving developmentally disabled kids.”

The mental health director was shocked. How could they be serving developmentally disabled kids with Mental Health funding? She responded by ordering an audit of the program.

The result of the audit was devastating. In the end, 100% of PCC’s service units for the previous year were disallowed, because the children were found not eligible for the funding source. PCC was held to owe the county over $200,000. PCC, with most of its board jumping ship, found itself unable even to assemble a quorum for its next meeting. With the situation untenable, the remaining board members approached EBAC about the possibility of again considering a merger.

We needed to move quickly. I worked hard to persuade my board that a merger was still the right way to go. It was not easy, however. In reviewing PCC’s books, we found that in addition to the audit disallowance, which they had no way to repay, the outpatient program was losing $60,000 a year. PCC had covered the past year’s deficit by taking out an interest-only, 13% second mortgage on their building, with a balloon payment due in six months!

Now the question was, “What could be salvaged?” Our board members balked until my team showed them there was still enough equity in the PCC building to make the merger a good deal, even if nothing beyond the building could be saved. Finally, they agreed to the merger, though only under an arrangement that, ironically, looked more like a takeover than a merger. We dictated terms to PCC, and PCC’s remaining board members accepted. The merger agreement was approved through a telephone poll of PCC’s remaining trustees.

And thus, we went ahead. EBAC paid off the second mortgage from our reserves and negotiated with the county that the PCC Day Treatment program would close down in exchange for not having to repay the $200,000 audit disallowance. One relatively new trustee from the PCC board joined the EBAC board. EBAC made a commitment to try to restore the services lost in PCC’s demise and began using its building, which was acquired for half its market value, for our own overflowing programs and staff. All remaining PCC staff were laid off prior to the merger’s effective date, in order to tap PCC’s unemployment insurance rather than EBAC’s.

Things looked much brighter just two years after the merger. EBAC resurrected the preschool day treatment program with county funding and a new partnership with Children’s Hospital Oakland, serving children with identifiable mental health diagnoses. The former PCC board member who came to EBAC became the organization’s treasurer, and the PCC building became home to EBAC’s growing administrative staff.

This was not a happy story, however. It probably fits your idea of a nonprofit merger as little as it did mine. Thus, one of the great deterrents to merger: the leap into the unknown.

Nonetheless, viewed in retrospect, this merger was largely successful. Though PCC’s program did “die” for several years, it might have been saved if we had been able to come to an agreement on the first attempt. Unfortunately, PCC’s board was not ready at that point. They were only interested in a merger when it became clear, after the audit, that PCC was failing — that there would be unresolved debts and even possible board liability in a potential legal action by a former executive director. (This last factor was no small matter, but we only learned of it after the merger. Fortunately, we resolved it cheaply and quietly.)

Ultimately, however, PCC’s building was kept out of the hands of its creditors, and after two years of hard work, the program was resurrected.

What did I learn from this experience?

1. Never underestimate the power of group dynamics over rationality. People cannot always be counted on to act in their collective best interest, especially as defined by someone outside the group. I “knew” that PCC was living on borrowed time, and I knew what moves were needed to preserve its services. But this knowledge did no good. Powerful group dynamics can keep a dying organization from seeing its own predicament.
2. Don’t threaten your partner, even if they are weak. A threat to autonomy, identity, or other critical, deeply held values will kill a merger effort. Approach the other group respectfully, in a manner that allows its leaders to save face. The merger process must provide a way for the mission, individuality, and culture of both groups to be valued and incorporated into the new entity. Fear of change, loss of autonomy, individual egos, habits, and culture all cause nonprofits to avoid mergers.

I made the mistake with PCC of assuming that once I had demonstrated it had no choice but to merge or dissolve, they would simply ask where to sign the document. Instead, I had insulted them, questioning their deepest assumptions. This caused them to retreat further from a consideration of the facts.

3. A dysfunctional board may not speak with one voice. While we negotiated in good faith with PCC’s board, factions of this very same board were seeking the support of our mutual funders to block the merger.
4. People have assumptions about mergers that make true negotiation, worked out in good faith, difficult. Because of confusion with corporate takeovers, the “weaker” party in a merger is bound to suspect the initiator of trying to maneuver into a position of unfair advantage.