It's a hard time to be an independent school or a university.
In the independent schools space, the VAT and business rates position is having a severe impact and we are seeing many schools having to make very difficult decisions and, in some cases, close their doors. In higher education there is a huge squeeze on university finances, with the Office for Students last winter predicting that 72% of universities would be in deficit by the end of the academic year.
Many of these institutions will have healthy fixed asset registers containing valuable property and will be able to pass the 'balance sheet test' but may not, in the short to medium term, be able to readily liquidate those assets and pass the 'cash flow test' to meet the demands of their payroll and other immediate liabilities. This can result in circumstances where a school or university which may be at risk of becoming insolvent is still an attractive partner for another institution with a stronger cash flow position.
Many of our clients are responding to these difficulties by thinking harder about the way they work and particularly how they work with other providers.
At the best of times, there can be what we call 'pull factors' that encourage organisations to collaborate. These might be the potential for increased impact or to learn and share new skills. In the present climate, we are seeing collaboration driven much more by 'push factors', predominantly rooted in financial struggles.
Where either pull or push factors are weaker, we typically see less formal, lower levels of collaboration between schools or universities, which might be implemented readily and without significant investment. Where those factors are stronger, then fuller and more formal types of collaboration tend to emerge. These might be, for example, formal joint ventures perhaps to recruit more students or pupils, or opening a new project or shared subsidiary institute such as a business school. Where the factors are at their strongest, we see the fullest expression of collaboration, in mergers and takeovers.
There are a few key principles to get right when considering any sort of collaboration. Doing this at the outset can ensure that things run smoothly and that the parties achieve the outcomes that they want. For example, approaching the matter – even where things are uneven between the parties – with mutual respect and esteem. Equally, being clear that your mission and values are aligned, and understanding your own objectives and why you're looking at this proposal. It's not enough, from a legal duties or even basic commercial point of view, simply to think that collaboration must and always will be a 'good thing'. There will then invariably need to be some close financial and legal due diligence to help you really understand your intended partner.
Due diligence is obviously a key aspect when looking at the fullest forms of collaboration in merger or takeover. School and university governors are subject to duties to act in their institution's best interests and to exercise due prudence in the stewardship of their assets, which means that any meaningful project should only be undertaken with a healthy degree of caution and both parties' eyes wide open.
Sometimes these duties can lead governors to take a different approach to the collaboration structure itself. For example, when it comes to mergers, we are seeing a number of our clients taking a phased approach. This involves as 'phase one' a party (often the more robust financially) taking on the other as a wholly-owned subsidiary. The parent would typically have certain controlling rights, such as to appoint and remove the subsidiary's trustees/governors and would often offer various kinds of support, whether financial or otherwise. Equally, though, this can open up benefits for both entities, for example through joint procurement, economies of scale and shared internal resources.
This 'phase one' model may work well for a period, perhaps while the parties get to know each other, develop and adopt common policies, and become part of the same family. It may even be a permanent solution in some cases. In others, it's sometimes followed by a 'phase two' fuller merger, involving hiving-up the assets and undertaking of the subsidiary entity into the parent. Clearly in some cases it will make more sense to proceed straight to this full integration and to bypass the subsidiary element.
The crucial point is that school and university governors should not assume that collaboration is something to approach in a one-size-fits-all way. Every organisation is different, with its own particular stakeholders, values, ethos and culture. The way that you work with others should be thoughtful, considered and right for your own circumstances.
Whatever kind of collaboration might be right for your school or university we would be very happy to have a conversation and to help you develop your thinking around the outcomes you want, and how best to achieve them.
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.
