Today, organizations are more willing to think about affiliation as a strategy for growth, rather than a rescue.
Senior living organizations considering a strategic relationship must determine whether joining together will sustain, strengthen and potentially expand their missions. Deciding whether another organization is compatible in mission and purpose is a process that requires careful thought and planning.
The first step is to define the objectives and articulate the circumstances or characteristics to avoid. Once the objectives are clear, the organization can consider a range of models and relationships to meet the overarching goal of sustaining its mission—and possibly expanding it.
Crisis Combinations
For-profit companies typically evaluate potential relationships with other companies in terms of ownership. Nonprofit senior living entities, however, are not technically owned by anyone; therefore, they evaluate potential relationships by considering how control, membership, program integration and leadership will accomplish their purposes.
Senior living organizations might consider an “affiliation” for many reasons, including having enhanced access to capital, strengthening “intellectual capital” (i.e., people resources), creating a safety net, improving or diversifying a market position, and prompting or accelerating growth. Over the past decade, the primary driver has been access to capital or solving financial difficulties.
Strategic Growth Without Taking the Leap
Several common tools that allow an organization to grow include collaborations, alliances and joint ventures. Generally, nonprofit senior living organizations retain significant control of their core operations in these situations.
- Collaborations. Collaborations or partnerships offer single-site and multi-site organizations an opportunity to build relationships that enhance their abilities to serve their missions while still maintaining their individual identities. Such collaborations may offer residents new or higher-quality programming. The last decade has seen an increased number of collaborations among senior living organizations or between senior living and other community-based organizations.
- Alliances. An alliance is a pact or coalition between two or more parties. Typically the organizations joining an alliance commit to hiring staff, funding the alliance’s common goals and securing common interests.
- Joint ventures. A joint venture is usually synonymous with a partnership. The National Center on Nonprofit Enterprise says “a joint venture can be established in any one or a combination of three legal entities: corporations, partnerships and limited liability companies. There are federal and state law ramifications for each of these legal forms, and in almost all cases, the choice among them will be made on the basis of who will be liable for the debts incurred in the venture and how its profits will be taxed.”
Affiliation and Models for Transition
For organizations that find the affiliation route driven by need rather than opportunity, the reasons are usually financial, organizational or market-related. Financial reasons include the need for cash or credit to refurbish a physical plant, meet financial covenants, or address the changing demands of current or future residents. Strategic affiliations could help resolve organizational needs prompted by a CEO transition or board fatigue. Market-related issues could also be resolved through affiliations that specifically address mounting operating and financial pressures caused by weakening occupancy, thinning margins, inability to attract and retain qualified staff, or inadequate reserves.
While the organizational and legal details vary dramatically depending on each situation, there are essentially three legal structures (models) by which a nonprofit senior living organization can affiliate with another nonprofit:
- Holding company model. Also referred to as a parent-subsidiary or member model, this allows the organization to join or create a “system” that enables access to shared resources such as capital, people and markets. At the same time, it offers the affiliating organization some of the attributes of an independent organization, including retaining a board of directors and possibly its identity.
- Merger/division model. In this model, the nonprofit ceases to have a separate corporate identity; instead, it merges into the corporate sponsor. It may subsequently operate as a division of the corporate sponsor, or it may be fully integrated. In this model, the nonprofit has no independent ability to enter into contracts or access capital, and it has no board of directors. Although many sponsors using this model operate each division as a separate unit, there are no barriers to transfer assets from one division to another. Debt is incurred at the sponsor level, and typically, all revenues from all divisions are available to meet debt service payments and other obligations of the sponsor.
- Federal model. The federal model provides a higher level of autonomy for affiliates. Although autonomous, each affiliate is able to access specific resources and programs through the sponsor organization. Each affiliate maintains its own board and governance, though the sponsor generally approves the election of directors or trustees, and each affiliate conducts its own financial assurance (audit) program, maintains its own balance sheet and is generally responsible for its own budgeting process.
An affiliation agreement knits the federal model together. Each participant subscribes to core values and practices, and agrees to extensive sharing of information within the federation. The sponsor provides services to all affiliates for a fee, and there is typically little or no board overlap among the sponsor and the affiliates.
In the past, the consideration of affiliation and sponsor transitions rarely occurred without a financial crisis. Today, collaboration and affiliation can be viewed as components of strategy. With multiple options available and innovative approaches being considered each day, nonprofit senior living organizations are wise to first define the objectives to be met by an affiliation, then consider the affiliating organization’s ability to meet those objectives. When there is an alignment of both values and objectives, the likelihood of a successful courting process and alliance are increased exponentially. iBi
Scott Townsley and Melissa Yoder are principals at CliftonLarsonAllen LLP. Connect with them at [email protected] or (610) 805-6303, or [email protected] or (309) 671-4500.
