How to do due diligence - and top 10 tips Helen Elliott April 2013

Why would you merge or collaborate? “Partnership is the sublimation of loathing in the pursuit of funding” Or per Charity Commission “ trustees of a charity have a duty to consider regularly whether the charity could be more effective at achieving its objects by collaborating or merging with other charities”

Current challenges Recession Funding pressures Funders require collaboration More competition from other providers More competitive tendering Increasing need for your services What else?

The collaboration continuum Joint working 2 or more charities On a project or venture Or sharing resources Joint committee Working jointly or info sharing on a project or Joint venture Full sharing services companymerger

What to think about…. Why are we considering this? Collaborate or merge? Is it in the best interests of our beneficiaries? Are our objects, vision and culture compatible? What will our stakeholders think? What due diligence will be required?

Opportunities for you? Discuss in groups and report back Are you collaborating already? Are you thinking about collaboration or merger? What are the benefits and risks? When will you and when won’t you?

Benefits include: New or improved services Access to funding Improved services for beneficiaries Cost savings Knowledge, good practice and information sharing Sharing the risk in new and untested projects Capacity to replicate success Stronger, united voice Better co-ordination of organisations' activities Competitive advantage Mutual support between organisations

Risks include: Outcomes do not justify the time and resources invested Loss of flexibility in working practices Complexity in decision-making and loss of autonomy Diverting energy and resources away from core Damage to or dilution of your brand and reputation Damage to organisation and waste of resources if unsuccessful Lack of awareness of legal obligations Additional costs/liabilities Stakeholder confusion

Feasibility study Will this help you achieve your charitable objects more effectively? Is there a cultural fit? What are the benefits and risks? Are there legal issues to overcome? What will the costs (time and money) be?

Develop a business case Background – key drivers Describe new way of working Benefits – tangible and intangible Costs and compare with status quo One-off costs of change, including staff time High level plan Risks and how they will be managed Exit strategy

Due diligence To ensure the merger or collaboration is in best interests of the charity’s beneficiaries will not expose the charity’s assets or beneficiaries to undue risk Consider is the merged organisation a safe house for the charity's assets? what risks and liabilities are being taken on?

Due diligence Background and governance Management and people IT and accounting systems and management information Financial information Assets and liabilities Other legal issues Post-merger issues

Background and governance Overview of external environment and competition Organisational structure – governance and management Review of strategic planning document and risk register

Management and people Details of staff, job titles, pay and length of service Pension contributions and schemes Details of contracts of employment, staff manual and policies Staff relations and trade union representation Details of volunteers and related policies

Information systems Analysis of age and suitability of IT systems – finance and donor or other records Overview of internal controls and financial procedures Management letters from auditors and management response

Financial information Statutory and management accounts, budgets, cashflow Funders: grants, contracts Fundraising activities and rate of return VAT and other tax compliance issues Restricted and unrestricted funds Reserves policy and position

Assets and liabilities Premises – owned and leased details of tenure, usage, rents, dilapidations, tenants and terms etc Investments Debtors and creditors Pension liabilities, deficits, guarantees Contingent liabilities Bank facilities

Other legal issues Power to merge TUPE and contracts of employment Pension schemes Properties, leases and dilapidations Intellectual property Other legal contracts Insurance Permanent endowments

Post-merger issues Pro-forma post-merger statement of financial activities and balance sheet Financial projections going forward Accounting for the merger Consents from regulators, funder etc VAT IT systems And more!

Top tips: who does the due diligence? Use Charity Commission checklists What areas are required in your case? Consider deal breakers early Who has the skills for each area: o Trustee / staff member o Consultants o Accountants o Lawyers

Top tips Consider deal breakers early Be flexible about direction of merger – e.g. A to B, B to A or A&B into new C Decide based on legal issues and sort via new trustee board Use Charity Commission due diligence checklists What areas are required in your case?

More top tips Due diligence: internally, externally or mix If outsourcing due diligence, consider using one firm of accountants and one firm of lawyers on both/all – OK if share all info Seek specific funding for merger costs Appoint project team for pre & post merger Don’t forget the day job – cover it Day of merger is the beginning not the end

Further info… NCVO on Collaborative Working Charity Commission booklet CC34 - Collaborative Working and Mergers: An introduction Choosing to collaborate: Helping you succeed Making mergers work: Helping you succeed Sayer Vincent guides: Collaborative working made simple and Mergers made simple