Charity mergers: some initial considerations
By Lauren Scott
According to the most recent Managing in a Downturn survey, one in five charities is considering merging with another organisation in order to survive increasingly challenging economic conditions in the third sector. The survey carried out by the Charity Finance Group, PwC and the Institute of Fundraising found that more charities are now thinking about an amalgamation than at this time last year, with 20% of charities surveyed now considering mergers as part of their planning process. With the majority of organisations surveyed reporting that they are experiencing both increased demand and reduced income, the report unsurprisingly suggests that merger opportunities are seen as a response to the bleak conditions in the sector, rather than as an opportunity for growth.
It is easy to see why charities are attracted by the prospect of spreading the demand for activities, taking advantage of economies of scale and sharing support services and expertise. Merged organisations may also find it easier to secure funding. A key objective of any merger will, or should, always be to improve or at least maintain the benefit the charities are providing to their beneficiaries. Nevertheless, the merger process can be a significant undertaking for charities, especially for smaller organisations.
As well as analysing whether the two organisations have the right synergies to be able to work together, and also not forgetting the human dimension, just some of the other key issues which each charity will need to consider are as follows:-
- know your partner - each charity should carry out a due diligence exercise on the other charity so they know what they are getting into, and what assets the other charity owns (and what liabilities they are responsible for);
- employment law issues including the application of the Transfer of Undertakings Regulations will need to be considered. The treatment of pensions (and in particular any defined benefits scheme) will need to be carefully managed; and
- think about your contracts such as any grant agreements, and what will happen to them if your organisation ceases to formally exist. Are they capable of being transferred? Do you need to seek the other party’s consent?
- don’t forget your members - depending on the existing legal structure, they might need to formally consent to the merger. Even if you don’t need their formal consent, you need to make sure they will continue to support you. So, make sure you understand the role your members will play, and engage with them at the right moment in time; and
- bear in mind that OSCR is likely to be involved in approving the merger in advance. Make sure OSCR’s turn around times have been factored into the timetable. HMRC will need to be notified of any changes too.
There are inevitably a wide range of issues which one needs to consider when thinking about a merger. Getting it right from the start is hugely important.
Our Third Sector Team has many years of experience acting on behalf of charities which are considering a merger, and we have been involved in some high profile mergers over recent years. If your charity is considering a merger, or if you would like more information about the work the Team does, please contact our expert, Lauren Scott, on 0131 247 1085 or email lauren.scott@morton-fraser.com.
