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How M&A could protect the social mission of charities, social enterprises and other not-for-profits impacted by COVID-19.

In 2019, there were an estimated 58 mergers in the charity, not-for-profit and social enterprise sectors in the UK, which involved 116 organisations (Source: Eastside Primetimers). 

This is an incredibly small number considering there are over 168,000 registered charities and it is estimated that around 100,000 UK businesses are social enterprises.

Most charities are familiar with the idea of a merger, with many people commenting that there are too many charities addressing similar needs across the sector. There are significant structural and practical barriers to mergers, including the limited availability of funds and changing of contracts and TUPE. In practice, and more importantly, there are often cultural barriers to a merger including:

  • Founders and Boards not wanting to lose control as they feel their charity is adopting a better approach than others
  • Persuading someone (usually Chairs and CEO’s) to step aside
  • Mergers being perceived as “corporate” and as large faceless organisations swallowing up locally connected and attuned ones

However, due to COVID-19 many charities are concerned about funding and social enterprise income streams are no longer as sustainable and certain as they were before the pandemic. Even for those currently sustained by government programmes such as the Job Retention Scheme, there are fundamental uncertainties around the return of demand from consumers and businesses as lockdown is eased. Trustees and social entrepreneurs from these organisations are seeking alternative methods to ensure that their causes can continue to be supported through these turbulent times. 

About the author

Alex Judd

+44 (0)20 7556 1457
judda@buzzacott.co.uk
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This is an incredibly small number considering there are over 168,000 registered charities and it is estimated that around 100,000 UK businesses are social enterprises.

Most charities are familiar with the idea of a merger, with many people commenting that there are too many charities addressing similar needs across the sector. There are significant structural and practical barriers to mergers, including the limited availability of funds and changing of contracts and TUPE. In practice, and more importantly, there are often cultural barriers to a merger including:

  • Founders and Boards not wanting to lose control as they feel their charity is adopting a better approach than others
  • Persuading someone (usually Chairs and CEO’s) to step aside
  • Mergers being perceived as “corporate” and as large faceless organisations swallowing up locally connected and attuned ones

However, due to COVID-19 many charities are concerned about funding and social enterprise income streams are no longer as sustainable and certain as they were before the pandemic. Even for those currently sustained by government programmes such as the Job Retention Scheme, there are fundamental uncertainties around the return of demand from consumers and businesses as lockdown is eased. Trustees and social entrepreneurs from these organisations are seeking alternative methods to ensure that their causes can continue to be supported through these turbulent times. 

Why should you consider M&A?

Why should you consider M&A?

For those organisations in the sector that do remain well funded, there is the opportunity to support and maintain the good work of those struggling organisations operating in their space, which is where mergers and acquisitions (M&A) should be considered. M&A would provide the struggling organisation with the support it requires to continue operating how it was and support causes it is passionate about. There are also a wide number of benefits for the acquiring organisation, such as increasing its charitable impact and integrating systems to improve synergies.

What risks are involved?

What risks are involved?

M&A is a simple, effective strategy but unfortunately not a risk-free one. We have identified a number of risks associated with M&A in the charity, not-for-profit and social enterprise sectors, including:

  • Reputation uncertainty, alignment of mission and board buy in
  • Integration of people and cultures – e.g. management bandwidth and TUPE
  • Pension commitments including local government schemes
  • Historic tax liabilities – e.g. IR35 and VAT
  • Financial viability
  • Mismanagement of funds
  • Accounting records and reporting deficiencies
  • Fraud risk
  • Donor retention post transaction
  • Loss of key personnel

We foresee an increased focus on cash flow and forecasting due to the pandemic. Scrutinising these risks has never been more important due to the political and economic uncertainty on the horizon.

How we can help

How we can help

Due diligence for mergers and acquisitions

Our Corporate Finance team has extensive experience of advising on mergers and acquisitions in the charity, not-for-profit and social enterprise sectors. While money does not always change hands for these transactions, risk is always a key consideration and this is where our experts provide invaluable support. 

Working with our specialist charity and not-for-profit team, our due diligence advice helps the parties involved to identify, understand and mitigate these risks, which enables all stakeholders to not only satisfy any statutory and legal responsibilities, but more importantly enhance the support that the organisations can provide to the cause.

If these hurdles can be overcome, M&A can help those struggling with funding during and after COVID-19 by becoming part of a well-funded organisation. These organisations will be presented with opportunities, which are not only very attractive financially but can also enhance growth and raise awareness for the cause.

Other strategic options

M&A is part of a range of options for organisations in the sector. Other strategic options, which could solve the issues mentioned above, include back office sharing and supply chain integration.

Charities and Social Enterprises should also consider if their work involves development or innovation of any kind. If this is the case, you may be eligible to submit an R&D tax credit claim, which could provide up to 33% cashback on any qualifying expenditure.

Additionally, it is worth reviewing the terms of any grants rewarded and ensuring where possible you have asked for extensions if you are struggling to fulfil the terms due to furloughing staff or lack of additional donations.

Get in touch
Get in touch

For more information on the above or for advice tailored to your organisation, please contact Alex Judd or fill out the form below and one of our M&A experts will be in touch.

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