Charity Mergers are on the increase - what are the risks involved?

It is no surprise that the cost-of-living crisis is affecting everyone across the board. This crisis is having a knock-on effect in that more charities are likely to consider mergers as a strategic choice that makes sense. In the world of corporate finance, merger and acquisitions (M&A), are commonplace. But what does merger mean in the Non-For-Profit (NFP) world? In simple terms, a merger of charities means two or more separate charities come together to form one organisation. The end result would be the following:

• A new charity is formed to continue the work
• One charity takes full control and utilises resources from the other
• Assets from all charities are shared

For charities to merge, the focus is mainly on finding a partner who has similar beliefs and values to their own – this would all ensure a seamless transition for a merger. However, there’s a lot more to think about when deciding to merge with another partner. While close partnership working and collaboration may aid in increasing a charities impact and share back-office costings, the decision to formally combine resources in a merger should be carefully considered and needs appropriate professional advice.

Risk Management is a central factor of the decision-making process when a merger is considered. It is important to carry out an initial assessment early in the process as this will flag any potential issues that can be addressed in discussions. The assessment will need to be revisited and expanded later in the process. Issues that arise can be any one of a number of things including, cultural, structural, financial, professional or political.

Identifying issues early can help all parties to decide whether these issues can be overcome or if the merger should not progress. Issues to look out for when assessing a potential merger partner include:

• Leadership.
• Communication and Culture.
• Employee Engagement.
• Role and identity post-merger.
• Planning and Strategy.
• Financial Strategy including income and expenditure plans.
• Resource Management and allocation.
• Systems Integration.
• Project planning/process management

Once all parties are confident that any issues can be managed, mergers can bring real benefits to all involved, which includes:

• Charities can overcome financial challenges by merging with another charity – an option which may be purely based on survival.
• Access to more funding – partnerships can be seen as a better way for funders to get better value for money.
• Increasing the reach of services – charities who merge can benefit from a wider number and range of beneficiaries.
• Reduction of costs – charities can make better use of resources and focus on those activities that have the biggest impact.
• Learning and skills development – charities can share experiences and learnings to better their ways of working.
   

All charities involved in a merger should seek and evaluate input from key stakeholders and core advisors including legal, finance and HR professionals.  In the interest of each charity involved in the merger, gains of merging must be clearly stated. Compatible objectives, culture and values are all key to merging and there should be a unified approach at board level with all trustees agreeing on why the merger is the best way forward.

An informed decision should be reached based on the following:

• Detailed business case which outlines clearly the reasons for the merger which includes associated costs, risks and benefits. What’s important here is to clearly demonstrate that the merger is in the best interest of your charity and beneficiaries.
• Comprehensive due diligence – all risks and liabilities should be considered prior – including Commercial, Financial, Legal and HR.
• Charities have many stakeholders involved and when deciding to merge with another charity, it’s important to communicate and involve all stakeholders in the change prior to any decision being made.

It is important for charities to measure success in determining if the merger has been completely successfully. For example, have the charities benefited from an increased income, extended reach, cost savings, improved outcomes and staff satisfaction. All these measures need to be evaluated and it’s important to consider how. Clear success measures should be identified at the beginning and used to monitor the merger’s achievements against the original objectives outlined in the business case.