Even prior to the challenges that the past few months have given the sector because of Covid-19, we had already seen a number of professional bodies consider collaborative working opportunities, whether it be joint initiatives, joint events or mergers. There are some key questions to consider before you start the process:
- Is a merger in the best interests of the organisation and its members?
- Will it improve the quality of service and support to members?
- Is the merger party compatible in terms of objects, visions and governance?
- Have the views of members and other stakeholders been sought?
- What are risks and benefits of merging?
- Are there forms of collaborative working that might achieve the same results?
- What are the costs of the merger process?
Why merge?
A merger can be the right option for a number of reasons:
- Increased reach of services.
- Reduced costs and duplication.
- Financial uncertainty or difficulties.
- Benefits from scale.
- Increased public profile.
- Improved learning and skills.
The board of an organisation must be clear about the factors that influence their decision to merge. Open dialogue between the merger partners from the beginning can prevent complications later in the process.
The boards from both organisations need to be united in believing that the merger is the best way forward, and the key question for each board as the process moves forward must be: is the merger in the best interests of our members?
To ensure a successful merger:
- The membership bodies must have compatible objects, culture and values.
- Effective communication is fundamental – with all stakeholders from the outset.
- It is important to identify the key roles and responsibilities in the process.
- All communication and negotiation should be undertaken in a way that reflects the interests of all parties.
So, what is a typical merger process? There are five key stages:
- Feasibility.
- Formation of a project board.
- Due diligence.
- Decision.
- Project team appointment.
Due diligence is a key part of any merger or acquisition, but what are the key financial assurances a due diligence assignment should give you?
1. Membership
If the membership numbers are dropping or there are low numbers at the entry points, this can be an indicator of a long-term issue, and will need consideration as part of the decision to enter into a transaction.
2. Key financials
It is worth getting further detail on the trend of the organisation’s financial situation, the cost base and recent surplus generation, paying particular attention to cash flow and the ability to generate cash operating surpluses for investment.
3. Liabilities
We have seen many poorly-worded bank covenants which could lead to an inadvertent breach. Careful consideration should be given to covenants both past and future to help prevent financing issues. The repayment terms also should be considered, as repayments are often at a fixed point in time and not in instalments, which is a potential future cash flow risk.
Pension liabilities are another key consideration: do they have defined benefit arrangements? What is the liability on the balance sheet? What deficit contributions are being made? Is the scheme closed to new entrants?
4. Tax
Tax is often the area where sleeping liabilities could be hiding, particularly across the two main taxes: VAT and employment tax.
It is important to ensure that the organisation has been treating all its income streams correctly for VAT purposes. Other considerations are treatment of income streams such as lettings, cost sharing arrangements with group entities and overseas transactions.
Deal breakers?
Beyond financial and legal due diligence, finding common ground to go through with the merger is key. It is preferable to identify any major barriers before embarking on what could be costly due diligence. Some common deal breakers include:
- Not having a clear business case for merging.
- Incompatible objects in governing documents.
- The size and composition of the new board.
- The name of the merged entity.
- Different cultures.
- Liabilities.
We recently presented a webinar on Strategic Opportunities: The New Normal, which can be viewed here.
Kathryn Burton is a partner and head of professional institutes and membership bodies at haysmacintyre
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