Charitable and Not-for-profit Mergers: Solution or Generalisation?

November, 2015

By John Vaughan-Williams, Lawyer

Mergers are a trending concept in the charitable sector, with several commentators questioning whether the sector will be able to thrive in the current economic climate without them. While these discussions have been centred on charities, other not-for-profit (NFP) organisations are also facing similar economic challenges, particularly for those that have numerous state branches as separate legal entities. Many have entered the debate, with former British Prime Minister John Major and several Australian federal politicians making comments.

The number of charities in Australia is growing at a considerable rate. The Australian Charities and Not-for-profits Commission has stated that on average, nine new charities are registered in Australia every day. Yearly in Australia, the number of registered charities is rising by approximately 3 per cent.

With this many charities being formed at a steady rate, the question arises as to how many of them are genuinely addressing a new issue, as opposed to duplicating what another organisation is currently supporting. Duplication is a hindrance to the prosperity of the NFP sector, as this increases competition and the possibility of conflicting messages towards a common goal.

Replies to these calls for mergers have been mixed. While there has been some support towards merging charities, particularly in light of recent successful, high-profile charitable mergers, some stakeholders have claimed that it is an unrealistic and oversimplified view.

This piece will consider the advantages, disadvantages, common misconceptions and considerations to be mindful of regarding charitable or NFP mergers.

Advantages

There are several benefits to a NFP merger when it is done effectively. Earlier this year, one of the more high profile charitable mergers in Australia occurred between Save the Children Australia and Good Beginnings, which has highlighted how effective mergers can be when well managed.

Some leading benefits of charitable mergers include:

Mergers provide the opportunity for charitable organisations to double their financial impact. This can occur both through pooling their own financial resources, and also through increasing their capacity to attract sponsorship and funding. Through proposing larger, combined projects and also having more resources to draw upon in grant applications, merged organisations are capable of gaining funding on a larger scale.

Often different charitable organisations will be working towards a similar goal; however will split their resources into different projects that achieve limited impact. Pooling the resources of organisations allows projects to operate on a larger scale, addressing multiple issues and creating a greater effect.

Disadvantages

Despite these prospective benefits there are some potential drawbacks to charity mergers, which have been raised by several stakeholders in the sector.

Some of these potential drawbacks include:

Some charities are particularly dependent on their unique brand and identity when it comes to raising support. In joining forces with another organisation thus incorporating elements of both brands, it is possible that integral aspects of an organisation’s brand will be lost.

The culture of how a charity operates, for its supporters, members and employees alike, may be unique. This culture may manifest in the expectations of volunteers, working hours of employees, or types of events run. By merging with another charity that has a different culture, some cultural aspects may not be retained, and could even cause conflict.

Common Misconceptions

When suggesting wholesale change such as mergers, there can be a tendency for commentators to make generalisations both in favour of and opposing. It is important that charities are not swayed by misconceptions when making merger decisions. Some popular misconceptions regarding mergers include:

It is integral for some organisations that their local projects still exist after merging, as there is a common view that these cannot continue if the organisation enlarges. Organisations can avoid losing their local impact if the merger is managed correctly; ensuring the goal to maintain this impact is made clear throughout the process.

If an organisation runs local, grassroots projects, it will not be prevented from running these projects under the banner of a merged organisation. In the example of the merger between Good Beginnings and Save the Children Australia, Good Beginnings still maintains its grassroots projects in local communities, whilst simultaneously Save the Children runs primarily on a more global scale. These local projects were retained through an open and well-planned merging process.

It is true that the growth rate of the number of charities in Australia is large; however this does not necessarily mean that there are too many charities towards all causes. There are, in fact, some causes to which there is currently insufficient attention. If a charity is considering a merger, the charitable area in which it advocates may not actually be overpopulated, even though others charitable areas are.

A merger will allow two charitable organisations to join their resources towards a common goal; however there are other ways in which this may occur. If there is a particular project that one organisation believes would be more effective in conjunction with another, the two organisations can run the project collaboratively whilst remaining as separate bodies.

Factors to consider

In light of these details, charities should ensure that they consider all relevant factors before undertaking a merger. It may not be the right move for all organisations, and there is no one blueprint for a successful merger. Mills Oakley’s ‘Checklist for Mergers’ is a tool that organisations can use if considering a merger, highlighting the important considerations that should be analysed before making a decision.

Some of the leading factors for a charity to consider before pursuing a merger are:

It is important to evaluate whether the two organisations have structures and operations that will be able to work together. In some instances, one organisation may run activities that detract supporters from the other. Furthermore, when charities have different working cultures, organisations should ensure that a compromise on culture can be reached, otherwise the merger may result in conflict.

Some organisation may look impressive, but are in fact struggling on the inside. Before undertaking a merger with another organisation, you should seek independent financial advice about the other organisation’s financial state, and also the potential impacts that the merger may have. Ultimately, the financial benefits of the merger should be considered against the costs of facilitating it.

If there are specific elements of your organisation that you believe would be improved by merging with another organisation, consider whether you would be better off collaborating on them, rather than completely merging your organisations and losing your independence.

Summary

It is clear that a merger can significantly improve an organisation’s effectiveness and reach, as well as addressing the difficulties caused by competition within the sector. However, a merger is not always the best move for every organisation, and there is no clear blueprint for how they should occur. An organisation considering a merge should heed the above considerations and evaluate possible alternatives before pursuing one.

Contact Mills Oakley

For more information, please contact:

vera-visevic

Vera Visevic | Partner
T: +61 2 8289 5812
E: vvisevic@millsoakley.c

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