Top tips for a successful charity merger

“Man is an animal that makes bargains: no other animal does this – no dog exchanges bones with another.” (Adam Smith, The Wealth of Nations). Popular public perception would have it that charities are too much like dogs and disinclined to bargain over their bones. In fact, the sector proactively engages in mergers and collaborations, but charity trustees lack the full freedom of their commercial counterparts because of their obligations to beneficiaries. In good times and more challenging ones, though, a merger can present a positive way forward. What are the basic considerations trustees should keep in mind?

Why?

The fundamental duty of charity trustees is act in the best interests of their charity, focusing on how the charity can best further its charitable purposes for the benefit of its beneficiaries. Is the proposed merger a way of achieving this? Perhaps the merger will enable the charity to benefit increased numbers of beneficiaries, and/or offer an enhanced service provision to them. It may expose the charity to a broader base of supporters, raise its profile and its fundraising potential. If the charity is to become part of a larger whole, it should benefit from economies of scale. The increased capacity a merged structure would provide may alleviate existing pressures within the pre-merger charity. A merger may also resolve or at least assist with a charity’s financial struggles. You should discuss and minute the rationale for the merger, such that the full board is clear about the motivation to proceed and can explain why proceeding is in the charity’s best interests. Remember to have regard to the Charity Commission’s guidance on trustee decision-making.

Who?

You are seeking a merger partner (or partners) who is compatible with your charity. This includes comparing (or instructing your advisors to compare) the charitable objects of the charities in question (and not simply assuming that because your charity and theirs carry out similar activities or operate in the same space, they are legally compatible). You also need to establish (with advice) that the charities concerned have legal power to merge. Compatibility extends beyond purely legal considerations, however, to culture, ethos, values and strategy. Your charity’s reputation and brand, its staff and volunteers will all be affected by a merger and you must take steps, through a rigorous due diligence process, to determine that there is sufficient alignment between the merger partners and that your charity will not suffer damage or harm as a result of the association.

What?

Be clear about what form, legally and conceptually, the proposed merger will take. Typically, a charity merger involves one charity transferring its undertaking to another charity, or a bespoke new charity being set up and the merging charities transferring their respective undertakings to the new vehicle.  The former structure in particular can have the sense of a “takeover” by the receiving charity, which can cause friction and resentment, and a sensitive approach is required to manage and mitigate, or ideally avoid, such perception. At the other extreme, the transferring charity may simply envisage walking away and winding up once the transfer has occurred. And there are several other possibilities for collaboration or alliance (with a greater or lesser degree of formality) with another charity which are short of full merger. Make sure all involved understand the nature of what your charity is doing and that you communicate it clearly and appropriately both internally and externally.

Where?

This will mean different things, depending on the merging charities. Are you moving into another charity’s premises? Are they moving into yours? Will you exist as a merged entity across more than one site, at least in the early days? Do the merging charities operate online? Do they deliver services abroad? The steps en route to merger, and the risks inherent in these as well as future merged operations, will vary according to the nature of the charities concerned. Be sure to think about location at an early stage, as the implications of the decision made may have long lead times, require third party consent (or at least engagement) and impact on staff.

When?

Plot a realistic timetable at an early stage, accommodating sufficient time for all relevant steps (including slippage) and allowing for the uncertainty of uncontrollable elements (for example, such as Charity Commission reaction and response times, where regulatory engagement is necessary, or those of landlords or lenders or major contractors). Aspects such as consultation with transferring employees follow strict statutory processes with which the transferring charity must comply. The target date for completion should be a sensible one from an accounting perspective (for example, a merging charity’s half or full year end), but whichever date is chosen must allow for adequate time for the pursuit of proper process.

A merger can be an exciting and fulfilling project for charity trustees, hopefully with the reward of an improved and thriving charity at its conclusion. It’s not necessarily a quick or cheap fix, but if it delivers better outcomes for your beneficiaries, it’s worth it. We will help you get there in legally sound style: no bones about it.