Mergers are becoming increasingly prevalent in the voluntary sector, reflecting current trends in public sector procurement and the economy as a whole. But why are they seen as attractive in responding to these trends? How do they work? And could this be the right way forward for your organisation?
Mergers - a rising trend
An increasing number of third sector organisations are looking to mergers and other forms of collaborative working as a response to the bundling of public sector contracts into larger packages. Smaller organisations are finding it increasingly difficult to compete for such contracts in their own right, but by joining forces with other organisations, they can access a range of benefits such as:-
- Expansion of range of services;
- Expansion of service area provision, e.g. in terms of geographical scope and categories of beneficiaries;
- Improved service delivery;
- Unique selling point and competitive advantage;
- Efficiency savings and better use of resources;
- Knowledge and information sharing; and
- Sharing of risk in relation to new projects.
Demystifying the process
It is no surprise then that so many organisations are opting for this route, but for some the process can seem complex and daunting. However, with the right legal support, it is still a very attractive option for a large number of bodies looking to increase their competitiveness, and for directors/charity trustees to find solutions which work in the best interests of their service users.
The first step would be to conduct a feasibility study, followed by undertaking due diligence. This term is used to describe the investigative steps taken by the relevant organisations to ascertain that a merger is in the best interests of their organisations and beneficiaries; it is the process by which each organisation finds out about the legal and financial position of the other, including liabilities - in terms of contracts, leases, employees and pension arrangements. This is particularly important for the transferee organisation to enable them to find out exactly what they are taking on, and to avoid any unpleasant surprises! It is also a good opportunity to investigate strategic and operational structures (e.g. organisational culture, IT systems) to check that the organisations are compatible.
Once both sides are satisfied that they can work together and that this is in the best interests of all involved, a decision would then need to be reached on which form of merger would be appropriate:-
- where both existing organisations effectively become subsidiaries of a new vehicle;
- both existing organisations merge into a new company; or
- one of the existing organisations merges into the other.
Further detailed legal advice would be needed at this point to determine which option would be best, and the exact steps to be taken in each case - but, broadly speaking, the next stage would normally involve obtaining formal consent from OSCR and then transferring the appropriate assets, leases, contracts and staff to the relevant body. Once this has all been dealt with, the merged organisation will be ready to go.
A merger can preserve and enhance the work which has been done by a charity, even if the organisation itself disappears - as well as cutting administrative costs and increasing efficiency. However, there are also some other potential problems to consider:-
- Loss of independence;
- Loss of focus;
- Poor cultural fit;
- Cost of implementing the merger;
- No easy exit strategy.
However, if any of these pose a significant problem, there are still other ways to become involved in collaborative working and access its benefits.
What other options are available?
A merger is only one form of collaborative working - a term which embraces a variety of legal processes which enable organisations to work together for mutual benefit. At the most basic level, a simple memorandum of understanding could be drawn up between the parties - essentially this is an informal agreement (normally not legally-binding) setting out the terms on which the organisations will work together and what they are seeking to achieve. Whilst this may not be appropriate in terms of bidding for large-scale public sector contracts, it can work very well on smaller or less complicated projects, allowing each organisation to retain its autonomy whilst benefitting from the other’s resources and expertise to further a common objective.
Another approach would be to develop a consortium. The Scottish Government published The Enterprising Third Sector Action Plan in 2008, which sets out a series of actions to help the third sector to play a full role in the development, design and delivery of services in Scotland. The Scottish Government recognises that one way of increasing third sector economic activity is through the development of consortia, thereby enabling the third sector (through a blend of different skills etc) to access and deliver larger and more varied contracts.
There are three key models for consortia within the social enterprise/third sector, as follows:-
- A contractual framework, consisting of an agreement among the members of the consortium to work together, setting out their legal rights and obligations (but without any additional legal entity in the shape of a joint body being formed)
- A contractual framework as above, with the additional feature of a joint steering group
- The establishment of a jointly-controlled company, as a separate legal entity, through which the consortium would be run.
There are, of course, a variety of other issues to be considered concerning this route, but it has proved to be successful for a number of high-profile third sector organisations in Scotland. If you would like further information on developing consortia, Burness drafted the official guidance on the subject, which can be found here.
Is collaborative working right for you?
With all of the options mentioned above, the same primary questions need to be addressed: Have you identified suitable partner/s that you can work with? What are the potential risks? Finally - do the overall benefits of collaboration outweigh the disadvantages for your organisation and its particular aims and objectives? If you can answer these basic points, you could have a partnership made in heaven…