This article from Steve Harper, Partner and Head of Social Purpose at HaysMac, outlines the main ways charities can collaborate and highlights key considerations for mergers, with a focus on practical insights.
Many charities are navigating rising costs, income pressures and growing demand for services. As a result, many are exploring increased collaboration or even merger. While these are often seen as a binary choice, there are a range of collaborative options available. Working together can help organisations pool resources and expand their collective reach, making collaboration an important strategic tool.
Forms of collaboration
Collaboration exists on a spectrum, from informal arrangements right through to full merger. Informal collaboration may lead to formal partnerships, but not always. Key options include:
Informal collaboration: Includes service coordination in a local area or shared learning. These arrangements are usually flexible and low risk, making them core to many community-based charities. However, they often rely on informal staff time and may be hard to cost accurately.
Shared services: Typically covers support services such as procurement, staff secondments or joint functions. These models can bring efficiency savings and resilience. Where there are long-term shared functions, there should be a clear agreement between the respective parties to govern the relationship.
Formal partnerships: Includes contractual collaborations like shared projects and joint ventures. Formal partnerships can support delivery of long-term projects, especially where each party brings a different skillset. As with shared services, there should be a clear contractual basis to the partnership. Furthermore, the risks need to be carefully assessed and managed.
Mergers: Mergers represent deep, long-term collaboration and can offer substantial benefits. However, risks and financial models need thorough analysis.
Forms of merger
Charity mergers can take several forms. Often, a merger involves a larger charity acquiring a smaller charity. This may or may not involve both parties retaining different branding at least initially. In this scenario, merger will usually involve the transfer of the assets and activities into the continuing charity but it can also involve the continuing charity becoming the sole member of the charity being acquired, which then becomes a subsidiary.
Less commonly, mergers can involve the coming together of two broadly equal parties. This can involve the transfer of the assets and activities from one party to the other, or the creation of an entirely new entity. It is important to seek legal and other professional advice.
What to consider?
When considering merger, there are a range of factors to consider:
Timing: Merger discussions often begin under financial pressure, but it is best to start early. A robust merger process takes time and should not be rushed in times of distress.
Strategy: Clarity on the merged entity’s strategy is vital. Mergers can reduce duplication, boost efficiency or extend strategic reach. The benefits and direction should be defined in advance, albeit more detailed plans will often be finalised post-merger.
Culture: Differing organisational cultures can undermine merger success, even if other aspects align. Open, transparent dialogue is key to identifying and addressing these differences early.
Financial model: It is important to understand the financial model of the merged organization. This includes the cost base, efficiency savings, and the ability to generate income. The financial model should assess post-merger integration costs which, in my experience, are often underestimated.
Restricted funds: Understanding restrictions is key – a balance sheet may appear strong, but if the merged charity cannot access funds carried over this needs careful consideration pre-merger.
Obligations: Review all contractual obligations, including leases, pension liabilities and employee benefits. Defined benefit pension schemes may require special attention, as changes in structure could trigger liabilities.
Governance: Establish clear governance for the merged entity, including board composition and decision-making during transition.
Due diligence: Appropriate due diligence is essential. Consider the size, complexity and risk profile of each organisation, and seek legal or accounting support to ensure risks are identified and understood.
Collaboration and merger offer real benefits, from efficiency savings to increased impact. Trustees and management teams should understand the full range of options, from informal collaboration to full merger, and ensure proportionate governance and contractual frameworks are in place. While financial pressures often drive these decisions, strategic collaboration can deliver enhanced outcomes for beneficiaries and greater resilience for charities.
Further reading
To boldly go, into a charity merger - Ben Clarkson, Asthma + Lung UK
Charity mergers rise by 31%, research finds - Civil Society