With rising demand, resource pressures and a rapidly changing funding environment, many charities are exploring whether collaboration or merger could strengthen their resilience and impact. This article from Hugo Walford and Jean Tsang at Bates Wells, sets out key considerations for charities contemplating collaboration or merger, along with top tips and common pitfalls to avoid.
Why charities collaborate or merge
Charities typically explore collaborative working to:
- Increase impact – by coordinating resources, minimising duplication or extending reach. There may also create opportunities to access digital expertise or specialist staff that the partner has.
- Strengthen operational resilience – particularly where there may be financial uncertainty, leadership transitions or regulatory pressures.
Types of collaboration
Although merger may offer a long-term solution in some circumstances, it’s not the only option, and it’s not reserved only for charities facing a bleak financial outlook. A range of collaboration models exists, each with different levels of integration, risk and complexity:
- Informal collaboration – informal partnerships include joint campaigns and advocacy. These arrangements are flexible and low-risk, often deployed to test alignment before considering deeper collaboration.
- A binding contractual collaboration – a more formal structure may be needed where charities are delivering services together, sharing staff or premises, or jointly bidding for funding. Consortium, joint venture or shared services agreements would need to set out clearly the roles and responsibilities of each party, how they’ll work together in practice and a clear exit strategy.
- Merger – the ultimate collaboration, merger typically involves the integration of the charities’ assets, liabilities and staff into a single entity. This may take the form of one charity transferring its undertaking into another, or both merging into a newly created charitable entity. Another option would be to structure this as a ‘change of control’ merger whereby one charity becomes the sole member of the other, so that they are in the same group. A change of control merger does not preclude a full merger later down the line.
Top tips and how to avoid pitfalls
- Be impact-driven – the core consideration should always be about impact and what is in the best interests of your beneficiaries. Clear objectives (and clear red lines) will help you shape the type of collaboration that is best for your charity. Don’t allow the structure of the collaboration to drive the decision-making process.
- Build trust and ensure cultural fit – successful collaborations require mutual trust between boards and senior teams. Invest time in relationship building, and really stress test that your respective missions, cultures and values are aligned. Transparency is key as is leaving egos to one side as far as possible.
- Prioritise due diligence – this is essential for every form of collaboration, though the level of scrutiny will vary. For informal collaborations, the process will be light-touch. For mergers, robust and early legal, financial and operational due diligence will help you understand the state of your charity partner’s health, identify any dealbreakers and inform realistic planning. Don’t forget about hidden liabilities such as unfunded pensions liabilities, unresolved disputes/litigation, property in bad condition, safeguarding and HR issues.
- Have a good communications strategy – appropriate and well-timed engagement with stakeholders (including staff, beneficiaries, major donors or members) is crucial, particularly in the case of a membership organisation. Unclear messaging about the collaboration/merger and why it will benefit the charity will risk staff turnover, galvanising opposition and generating unwanted regulatory interest.
- Regulation, governance and consents – for mergers, early review of governing documents (in particular, charitable objects and powers) and regulatory requirements is key. Consider whether you need any third party consents e.g. from funders or regulators. Missing steps can lead to delay or compliance issues. Trustees must document their decision-making process, ensure they obtain appropriate advice and always take decisions in the best interests of the charity.
Collaboration and merger can help charities seeking to strengthen impact, sustainability and resilience. With clear purpose, strong cultural alignment, careful due diligence and thoughtful communication and planning, they can really deliver real benefits to beneficiaries.
Jean Tsang is a partner and Hugo Walford is a senior associate in the Charities team at law firm Bates Wells.