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Since the beginning of the first national lockdown, given the difficult financial environment that many charities and social enterprises have faced, there has been expectation in the sector that over time there would be a noticeable increase in charity mergers as a direct result of the pandemic.  

The Charity Commission included links to its pages on mergers and collaborative working in its Covid-specific guidance, recognising that “the pressures of the pandemic may mean that charities need to reassess how they operate” and “in some cases this may be through collaborating or merging with one or more other charities”. The Commission even included a link to its register of charities, saying: “Charities in search of partners for collaboration or merger can use our register of charities to find potential partners” – the closest we have yet come to the Commission as merger match-maker.

Eighteen months later, however, Clive Vergnaud, Senior Associate in the Charity & Social Enterprise team at Stone King, observes that these expectations have not materialised. There have certainly been closures and asset-sales, especially among smaller, less-resilient charities, or organisations that were asset-rich but cash-poor. There have been (sometimes dramatic) reorganisations and changes in how services are delivered, with staff and volunteers redeployed according to need and major investments in tech-based alternatives for reaching beneficiaries. But merger activity does not appear to have increased. If anything, we have seen some long-nurtured merger plans put on hold or abandoned altogether as trustees and senior leadership teams focused on service delivery and survival. 

Perhaps, also, the sector is more resilient than we feared and traditionally-prudent approaches to building and maintaining reserves have allowed charities some time to consider their options. The Commission’s (uncharacteristically) permissive and understanding approach to unlocking permanent endowment and restricted funds may have helped, and fundraising levels have been high as community spirit has been galvanised. 

And, of course, the government support measures for charities and businesses, which remained in place for longer than anticipated, have bought time.

But as government supports come to an end, as the Commission begins to revert to its usual stance around charity finances, and as the dual bite of Brexit and the pandemic make themselves felt on the economy, now may be the time for trustees to look ahead and consider their options. And, as the Commission says: “In some cases this may be through collaborating or merging with one or more other charities”.

Our advice is always to encourage trustees to consider potential mergers and collaborations as an ongoing strategic matter, in much the same way as for-profit businesses merge to expand into a new geographic market or grow their range of products or services. Unfortunately, in the charity sector, the more common model for mergers does still tend to be the takeover model with one dominant charity taking over the services provided by a smaller charity, often in financial distress. In these circumstances it is especially important for both charities to prioritise improved outcomes for beneficiaries and their overarching duty to their charity’s objects, which can clash with the natural tendency to try to protect your own organisation, culture and staff. 

In these contexts, where there is an imbalance of power, we observe the following trends:

  • There is a tendency to explore the merger reluctantly, with suspicion almost, with a focus on preserving a brand, an identity, a culture, rather than a focus on achieving better impact for beneficiaries.
  • The sense of takeover persists beyond the merger itself, making it more difficult to embed new staff or activities, and to develop a new culture, in turn affecting the merged charity’s ability to deliver improved impact to its beneficiaries.
  • It is rarely the case that the charity being absorbed is doing everything wrong. A takeover mentality in the dominant charity can result in the strengths of the target charity being lost.
  • Personal concerns come to the fore, with employees concerned about losing their jobs and trustees worried about their reputations (both understandable), which can make the process more difficult.

All of these can result in the merger process being more complex, acrimonious, time-consuming, costly and – ultimately and most importantly – less effective for beneficiaries.

Considering a merger as a strategic opportunity rather than a last resort creates the breathing room to allow the needs of beneficiaries to be the main consideration.

So, for charities and social enterprises that are considering aligning themselves with another, some thoughts are set out below.

There are a number of ways in which two or more charities can combine their assets and activities to better advance their charitable purposes, including:

  • two or more organisations coming together to form a brand new organisation and transferring their assets and activities to it;
  • one charity transferring its assets and activities to the other;
  • one charity becoming a wholly-owned subsidiary of the other;
  • restructuring activities into a new or existing group of entities; and
  • service or asset “swapping” (for example so that each charity can achieve a more balanced portfolio of activities, income and costs).

It is important, though, not to get bogged down in structural considerations. What matters is what will achieve the best results for beneficiaries. For example, it will usually be cheaper and faster to fold one organisation into another than to set up a new organisation and fold the two merging organisations into it. That can feel like a takeover but need not – the receiving organisation can be restructured so that it is for all intents and purposes a new organisation; careful, honest and regular communications can help staff, beneficiaries and stakeholders to buy into the project and successfully embed the merger.

It is important to carry out appropriate due diligence, not just on financial elements but to understand as much as possible the culture, history and priorities of the other charity. We see mergers collapse at an advanced stage because charities have fundamentally different attitudes to the way in which services should be designed and delivered, or how the organisation should be led.

We recommend:

  • Being clear about what you want to achieve and what the potential outcomes are. If you have time and resources, starting with a small “test” collaboration to see what works and what doesn’t can be a useful first step.
  • Factor in costs. Many mergers do not materialise beyond the exploratory phase, and when they do, they can be costly. There will be cost in the staff-hours engaged, as well as in engaging advisors. Due diligence can take up significant amounts of time. Funding may be available from grant funders or sector bodies 
  • Agree a Memorandum of Understanding or Heads of Terms as early as possible. Putting things in writing teases out issues that would otherwise remain unaddressed until the later stages, at which point they could derail the project. 
  • What matters most are the strategic elements of the deal. How are activities going to be structured post-merger to deliver greater impact to beneficiaries?; how are complementary activities, structures and networks going to be blended to achieve greater reach?; what is the intended strategic focus of the merged charity, and might it result in some beneficiaries losing out? 
  • Establish a strong leadership team with a clear mandate and delegated authority to explore the merger. External consultants can provide independent, non-partisan advice, as well as being able to turn their full attention to the merger (unlike staff, who have their day jobs to be getting on with as well).
  • Trustees must always remember that their overarching duty is to their charity’s objects.