Charities should restructure to survive

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Alastair Keatinge, a specialist in charity law, says charity boards should consider collaborations, partnerships or a merger

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7th March 2016 by TFN Guest 0 Comments

As the public sector in Scotland grapples with financial pressures, the third sector must face the prospect of reduced funding and budgets. To maintain services, charities may have to consider that their organisation may be better placed for future success if it were structured differently

Austerity and public-sector squeezing cuts are much in the news again – Scotland’s 32 local authorities may have to cut as much as £350 million in spending this year, according to COSLA (The Convention of Scottish Local Authorities). One sector likely to feel this squeeze – indeed, already feeling it – is the third sector.

With the possibility of government or local authority funding cuts, restructuring may be the only way for charities to sustain their charitable activities. Therefore, as part of the increasing focus on governance, one crucial topic all charity boards should include on the agenda is: “Can we continue on our own? Or should we be considering collaborations, partnerships or a merger?”

Effective boards should regularly consider the potential of working with other organisations and provide the opportunity for strategic debate by the trustees.

Charities should restructure to surviveAlastair Keatinge

Given the financial pressures on local authorities, we expect further consolidation in areas such as cultural and leisure services, service delivery and care services.

Who’s merging?

We have already seen a number of mergers in education. For example, the Scottish Government’s decision to reduce the number of further education colleges required some colleges to merge. And the establishment of Scotland’s third sector interfaces, which provide a single point of access for support and advice for the third sector within the local area, also involved some charity mergers.

Given the financial pressures on local authorities, we expect further consolidation in areas such as cultural and leisure services, service delivery and care services.

However, it’s not just financial distress or pressures that should motivate thoughts of restructuring. Some successful mergers have resulted from long-term strategic decisions about synergies and efficiencies.

An over-reluctance to merge?

Left to their own decision-making on their futures, many charities are reluctant to be involved in discussions that might lead to a merger.

First, mergers are generally perceived to mean a loss of jobs, identity or control. But, according to a study of charity mergers for the Good Merger Index, three quarters of acquired organisations were able to retain some form of identity, management control and board representation. Though the research was focused on England and Wales, it is relevant to the Scottish charities sector.

Secondly, pensions, employment issues and other legal concerns often lead charity boards to push merger options down or off their agenda. However, these concerns are often unfounded.

Essential points to consider

When exploring a possible merger, trustees should consider the following checklist:

• is a merger in the best interests of the charity and its beneficiaries?
• what is our financial future without a merger?
• is the proposed partner compatible in terms of objectives, strategy, culture and values, governance arrangements, organisation structure and funding base?
• have we approached our stakeholders and beneficiaries for their views?
• will we carry out the due diligence exercise in-house or do we need professional advice?
• are there employment or pension issues to consider?

They must also consider the nature of the deal and the new structure. The majority of charity ‘mergers’ might properly be classified as takeovers, with a large charity generally absorbing a smaller organisation. Whilst ‘takeover’ can be an off-putting description, there are often good legal reasons for a transfer of assets into an existing charity rather than establishing a new charity as the merger vehicle.

It is important to realise that there are many ways to structure a merger, and not all mergers will bring job losses or loss of identity. It’s important to obtain good advice on the different options, to be aware of the potential risks and advantages, and to do rigorous due diligence of the other organisation at an early stage of the merger discussions.

Alastair Keatinge is charity law partner at Lindsays.