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.
Possible pitfalls
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...
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.