Despite evidence of the potential benefits of mergers in the not-for-profit sector, charities still find mergers difficult.
Our third annual review of not-for-profit mergers shows that despite continuing concern about duplication in the sector, just 0.07% of registered charities opted to merge over the past 12 months.
In 2015/16, more than 1,060 charities registered with the Charity Commission, bringing the total to 163,000. But only 116 organisations, with a cumulative income of £799.4m, took part in just 54 merger deals, according to our merger index [pdf], published on 24 November.
Do mergers work? The data shows that the turnover of those charities that led a mergers increased by between 6% and 150% over the two-year period – much better performance than the small organic growth in income for the voluntary sector as a whole over the same time. In seven out of nine cases we found the turnover of the newly merged organisation had also delivered additional growth in excess of the sum of the individual charities pre-merger.
When we looked back at charity mergers of 2013/14, we found most had increased scale over and above the sum of the two organisations before the merger, and in about half of the cases, the new merged organisation was more financially profitable than pre-merger. Given that they are still incurring merger costs we would expect this picture to improve further over the next year.
A total of £158m of income was merged last year, but this figure is skewed by the merger that involved four benevolent funds to create the the Masonic Charitable Foundation, worth a combined £82m. Half of all charity mergers continue to involve organisations with an income of less than £1m; a further 29% were between organisations with an income between £1m and £5m.
Many charity mergers continue to be driven in part by financial distress, particularly where smaller or local charities are involved – 61% of smaller merger partners are in deficit when they undertake mergers. Others go bust or end up transferring services to another relevant charity only at the point of closure.
Mergers are typically more productive when conducted from a position of financial strength and as part of a clear strategy to strengthen the organisation’s impact. And some charities, like the infrastructure body Community Matters back in March 2016, go under before they are able to find alternate arrangements for their valuable services.
This shows that though mergers can be of benefit to charities as they evaluate their options in a challenging environment, a concerted effort and fresh ideas are needed in the sector to enable more organisations to reap the potential benefits. This is a debate we sorely need to have.
Mergers still seem to be agonisingly difficult for many charities to pull off, especially those with smaller incomes, despite the successful outcomes for organisations that do merge.
The single biggest reason charities struggle with merger is that there is no driving force to motivate it. In the private sector, making money is a powerful force and entrepreneurs seek to sell their businesses. But for charity trustees there is, of course, no pay day and in many cases they will lose their position on the board – not something many care to do.
For charity mergers to happen, the chairs and chief executives from both organisations need to set aside personal interest and focus with a laser vision on the beneficiaries.
If the voluntary sector consistently put the interests of beneficiaries first then we would almost certainly see more charity mergers. There are technical barriers as well such as pensions, costs and finding the right partner but these are much less significant barriers – and frequently surmountable if the leadership is behind it.
To address this lack of activity and spur debate in the sector, we have suggested a number of actions, including updated Charity Commission guidance and clearer guidelines for trustees, a voluntary merger code, more research into impact and a mergers and acquisitions fund.
Richard Litchfield is chief executive of Eastside Primetimers. This blog originally appeared in the Guardian Voluntary on November 25th 2016