Special to the Philanthropy Journal

By Michael A. Strauss, CPA, Director

When people think about exit strategies, succession planning and business transitions, they typically think about a monetizing event for the owner of a privately held business. These topics are currently at the forefront of the minds of many business owners in the baby boomer generation as they approach retirement age. Whether they are seeking to move on from businesses they have founded, or companies that have been in their families for many generations, there are strong financial motivations to proactively plan for their exit.  Further, because these transactions typically culminate with a significant financial event, accountants, lawyers and other professional advisors are eager to assist businesses to ensure a successful transition, maximizing the return to the business owner.

Not-for-profit organizations aim for many of the same goals and objectives as a privately held business, but instead of focusing on a financial event, they seek a plan to ensure the success of the organization for many future decades. However, without the financial incentives, it is not uncommon for high-level employees to simply retire, without the proper thought and planning that may be required. 

In order for a not-for-profit organization to achieve minimal interruption to its ongoing mission upon retirement of a founder or senior executive, a proactive and engaged board of directors is required. Boards should seek notification from key personnel a minimum of 6 months prior to retirement, and longer may be needed depending on the longevity of the employee. Roles and responsibilities of the employee must also be considered. An executive that wears many different hats will be much harder to replace than one with a narrowly-focused job description. 

For larger, more established organizations, a proper executive search may be all that is necessary. However, when the executive who is moving on is the founder or has been employed by the organization for many decades, unique challenges exist. These challenges must be considered to ensure an effective transition to new executive leadership teams. Organizations and their boards should consider things such as the following, when planning for a leadership transition: 

• Readiness — For a transition plan to be successful, the founder must truly be ready to relinquish control. It is important for employees to gain respect for the new leadership team, which can only happen when the founder is in a position to step away and play a support role, allowing the new executives to establish their vision and gain employee support.
• Understanding — Founders of not-for-profit organizations often hold a unique mix of entrepreneurial spirit and passion for the mission of the organization. They may lead the business, oversee operations and play an active role in fundraising and development. Retirement of a founder may require the board to review the structure of the leadership team and consider if the skillset being lost will need to be replaced by more than one individual and whether the organizational chart needs to be adapted moving forward. Depending on the stage in the life cycle of the organization, this may also present an opportunity for a strategic planning session to not only assess the management structure, but the long-term mission of the not-for-profit.
• Involvement — It is largely understood that board members need to be involved in the hiring of a replacement, but it is also important to involve key stakeholders such as funders. If you have generous donors or foundations that provide significant grants and contributions to the organization, involving them in the process ensures that they are comfortable with the new leadership, ensures their buy-in and mitigates the risk of lost revenue moving forward.
• Transparency – Mid-level management and program directors are often the key to the success of a not-for-profit organization. It is important to keep them abreast of any transition plans, seek their input and provide proper constructive feedback if they are being passed over for a promotion. In the transition of a privately held business, it is understood that management will transition and such decisions are mainly financially motivated. For a not-for-profit, continuance of the organization’s mission is critical and steps should be taken to minimize the risk of a high turnover rate of key employees.

We live in an age where non-profits exist to support nearly every cause imaginable. The considerations above assume the organization will continue to exist as it was before the transition. Retirement of key leaders is also a time for a board to assess whether a merger into another non-profit should be considered. Such a merger would mitigate many of the challenges above, albeit with its own set of additional challenges. However, it may lead to significantly reduced administrative and fundraising expenses, allowing more dollars raised to go directly towards supporting the mission. While it may be a hard discussion for a board to have with a founder of a not-for-profit, it poses another option to ensure the legacy and mission live on far beyond their retirement.

Ultimately, if the board of directors stays focused on the overall mission of the organization and acts in the best interest of seeing that mission continue, a successful transition can and will occur. 

MICHAEL A. STRAUSS, CPA is a director in the Audit, Accounting, and Consulting Department and chairperson of the Government Contractor Services Group at Ellin & Tucker in Baltimore, Md. Michael brings to the table more than 15 years of expertise in providing management advisory, financial reporting, tax and other professional services to his clients. He can be reached at mstrauss@ellinandtucker.com.