Charity mergers – key considerations

The current economic landscape presents significant challenges for charities. Income generation, particularly through fundraising, is becoming increasingly difficult, while operational costs continue to rise. In this climate, preparing and then sticking to a balanced budget is demanding for charities of all sizes.

As a result, charities are beginning to ask whether the needs of their beneficiaries could be better met through a merger with another charity. While mergers may offer long-term efficiencies and greater impact, they also come with unique complications compared to those faced in corporate mergers or takeovers.

Top tips for charity mergers

Once initial discussions begin, preparing a clear plan and timeline can feel daunting. Considerations will vary depending on the position of each charity, but they broadly fall into four categories:

1. Governance and leadership,
2. Strategy and vision,
3. Operational planning, and
4. Financial planning.

Please note, the following lists of key questions to explore are not exhaustive but highlight some of the main areas to consider.

1. Governance and leadership

Governance decisions form the basis of any successful merger. The below considerations could shape how the new charity is formed, regulated, and led as an organisation.

Legal structure

• The legal structure of a merger is likely to depend on the respective size and stability of each organisation. The legal structure of a merger may also be different to how charities want to optically present a merger to the outside world. Input from lawyers will be needed.
• Will the trade and assets of one charity be passed to another?
• Will a brand-new charity be set up and if so, what will the legal structure of that charity be?
• What will happen to a trading subsidiary if either charity has one?

Charitable objects

• Both parties will have their own charitable objects. How closely aligned are these?
• If a new charity is being created what will its objects be?

Board composition

• After the merger, what will be the composition of the Board of Trustees?
• Will there be a specified number from each of the original charities?

Regulatory approvals

• Have you checked whether you need Charity Commission approval for the transaction?
• Are there any other bodies that need to be informed or permission sought from (eg Department for Education, Care Quality Commission)?

Governance process

• Have both Trustee Boards agreed to the merger?
• Should a smaller group of individuals, such as a sub-committee, oversee and drive the process?
• Will this be a joint committee for both organisations?

2. Strategy and vision

As charities consider merging, strategic alignment is essential to ensure the long-term success and impact of the new organisation.

Strategic alignment

• Both charities will have strategies in place which are governing current activities. How closely aligned are these?
• Are the organisations moving in different directions which could make merging harder to manage?

Beneficiary impact

• Will the merger increase the positive impact for beneficiaries?
• If there will be a disruption to services during the process, how will this be managed?

Stakeholder communication

• Which stakeholders may be impacted by the merger?
• How will external communications with stakeholders be managed to ensure consistent and appropriate messaging?
• What is the most appropriate timing for such messaging? This will need to be carefully handled when there are vulnerable beneficiaries involved.

3. Operational planning

Operational planning is critical to ensure a smooth transition for staff, systems, and day-to-day functions. Mergers can place significant strain on internal resources, so it’s important to anticipate practical challenges early.

Staff and HR considerations

• How will staff be informed and supported throughout the process? It’s important to get the messaging right.
• Will staff be transferred to a new employer via a TUPE arrangement?
• What are the different pension and benefit arrangements in place?

Organisational structure

• Each charity will have a staff organisation chart or similar. How do these overlay and what roles may be duplicated after a merger?
• Is there a redundancy process that needs to be managed?
• Are redundancy costs included in financial forecasts?
• Is there in-house HR expertise or is an HR consultant needed?

Internal capacity and external support

• Preparation for a merger is time consuming. How much time and resource can senior management realistically commit to the merger?
• How much support can a charity afford to get externally from consultants or project managers, for example?

Culture and integration

• Just because both organisations are charities it doesn’t mean the internal culture will be similar. Are the cultural differences understood?
• How will this be managed after the merger to foster a cohesive working environment?

4. Financial planning

Financial planning is a cornerstone of any successful merger. Beyond the headline figures, it’s essential to understand the full financial picture, including any risks, forecasts, and regulatory implications.

Due diligence and risk

• Remember that published financial statements may not show the whole financial position and are not current.
• What is the risk of unknown ‘off-book’ liabilities?
• Will either or both parties require financial due diligence to be carried out?
• Do the organisations have the skills in-house to do this, or will external support be required? If so, have the cost implications of this considered?

Cost savings and efficiency

• Are projected cost savings (particularly for support/back-office functions) realistic?
• Have the timings of those savings been properly assessed?

Forecasts and additional costs

• Have all new or additional costs been factored into post-merger forecasts?
• Are there any hidden costs? For example, perhaps a struggling charity owns a building that urgently needs maintenance work – urgent building repairs or property investments may need to be factored in.
• Is a property report from a surveyor required?

Income and funding risks

• Could any income be lost due to the merger? This should be factored into forecasts.
• Does either party receive income from contracts for services and is there a possibility of these contracts being terminated?
• Are there any long-term grant agreements that may be impacted by a change in structure?

Statutory accounts and reporting

• The presentation of subsequent statutory accounts could look very different depending on the structure of the merger.
• Do management and the trustees understand the implications?
• Do you need to speak to your auditors about the implications?

Tax and VAT considerations

• Specialist advice may also need to be obtained in relation to tax and VAT.
• Are any additional registration requirements going to be triggered?
• Are there any additional tax or VAT liabilities to be aware of?

Useful guidance

The Charity Commission website includes useful guidance about the process of merging charities: How to merge charities – GOV.UK

In addition, your usual advisers (lawyers, auditors, HR consultants) will be well placed to support you through the process.

It may also be valuable to talk to senior management and/or trustees who have previously navigated a merger process. Ask them what they wish they’d known at the outset, or what they might have done differently in hindsight.

How we can help

A merger can be a complex process for a charity. If you’d like further support or have questions about your own merger plans, please get in touch with Helen Harte.