The essential CFO: exploring mergers

A narrative of encouraging more charities to merge has been around for many years, driven often from the starting point of “there are too many charities”.

 

While this viewpoint can be debated at great length, there is no ignoring the positives associated with a merger, regardless of the catalyst – a chance to free up resources, achieve economies of scale, and increase impact.

 

There was a feeling a couple of years ago that that the pandemic might lead to more mergers out of financial necessity, and the latest impetus is the current economic situation.

 

This is summed up by the chair of Mind, Stevie Spring, saying at the Charity Finance Group’s annual conference in 2022 that more charities were likely to merge as a result of the ongoing cost-of-living crisis.

 

There have been some high-profile successes, such as Cancer Research UK and Age UK, which each took years of planning and legal work. There have also been many examples where mergers did not work out for a number of reasons, and what seemed like a good fit in theory did not pass the planning stage.

 

Therefore, while each charity should be alert and open to the possibilities of merging, if it helps them be more effective and achieve their charitable objectives, it is not something to be entered into lightly. It needs careful preparation and a full consideration of the issues involved.

 

However, while a merger requires significant investment in time and energy, and possibly some initial financial outlay, fantastic outcomes can be achieved.

 

 

Defining mergers

 

The Charity Commission defines a merger as: “Two or more separate charities coming together to form one organisation. Either a new charity is formed to continue the work or take on the assets of the original charities, or one charity assumes control of another.”

 

This definition highlights that, as in the corporate world, a merger of charities is often perceived as a euphemism for a takeover, even if this is not in reality the case.

 

 

Example of a merger

 

A good example of a merger being completed in the next few months, where both charities are going into it as equals, rather than one taking over the other because, for example, it is in financial difficulties, is Fight for Sight and Vision Foundation.

 

The new entity will be led by the current chief executive of one, with the other stepping away from the charity to take on another chief executive role. Both boards voted unanimously to merge and are joining to “expand their reach and increase their impact”.

 

There will be two distinct areas of grant making – medical research and social impact – and each will have their own director and application process because the expertise required for each is so different. However, both branches of activity will sit within the one charity.

 

 

How many charities are merging?

 

Latest available data from the Good Merger Index, an annual survey of consolidation activity in the not-for-profit sector, identified 77 mergers identified involving 166 organisations during 2020/21, and a year-on-year rise in the number of small organisations involved. However, it also reported a marked fall in the number of larger, more complex mergers

 

 

Advantages of a merger

 

Most advantages centre around overcoming financial challenges. When charities merge the focus is often on finding a partner who has the same beliefs and values, so that there is a common shared goal about what they are trying to achieve, and can therefore work together to increase their reach to a wider number and range of beneficiaries, and their overall effectiveness.

 

Mergers can help to reduce costs and duplication to make better use of resources and focus on those activities that have the biggest impact. Increasingly funders see partnership working as a way of getting better value for money so it may assist in accessing funding opportunities.

 

Mergers can also lead to improved skills by sharing experience and learning new and better ways of working. And, especially during the current job market, it could make it easier to attract staff, at a competitive rate, with the required skills and expertise.

 

 

Barriers to a merger

 

While often cited as being a way of reducing overheads, the costs of merger can be significant, and not just financially, with numerous legal, structural, cultural, political, and practical challenges to be overcome. And change management is complex and time-consuming.

 

Identifying the following barriers and risks at an early stage, and looking at whether they can be addressed, will help in deciding whether or not to proceed with a merger: lack of leadership; poor communication; staff and trustee resistance and reluctance; fear of losing identity and independence; poor planning; and inability to integrate systems.

 

One of the most cited barriers to mergers is that ultimately there isn’t a cultural fit between the tow organisations, so this needs to be explored early on in the process.

 

 

Practical steps for a merger

 

Risk management is a crucial part of the process when considering a merger. As well as an initial assessment to identify any potential issues or barriers, this needs to be revisited throughout the process.

 

The gains of merging must be clear to see and in the interest of each charity. There should also be a unified approach at board level, with trustees stating that they believe the merger is the best way forward, and being able to make a sound argument with clear reasoning.

 

After initial discussions with key stakeholders, both internal and external, and taking appropriate legal, finance and HR advice from professionals, including due diligence, you can put together a detailed business case outlining the reasons to merge with associated costs, risks and benefits.

 

 

Communication around a merger

 

As different stakeholders may have concerns about the proposed merger, you need to communicate, understand and involve people in the change. The most important thing to consider and demonstrate throughout the process is that merger is in the best interest of the charity’s beneficiaries.

 

 

Steps once a merger is complete

 

Evidence will be key to determine if the merger has been completed successfully. How does it measure up against the initial reasons for merging? For example, has there been increased income, extended reach, cost savings, improved outcomes and impact, staff and volunteer satisfaction.

 

 

Alternative options to a full merger

 

Even if full merger is ruled out, closer partnership working may also provide valuable opportunities for charities to increase their impact, while driving efficiencies through shared back office costs, for example.

 

Indeed, a lot of successful mergers have been the result of an initial period of increased collaboration, which over time has resulted in the organisations taking the final step.