Eastside Primetimers have published our latest Good Merger Index, our comprehensive look at charity mergers and consolidation activity.
This is now the fourth edition of our annual Index, with data centring on charity mergers in the year of 2016/17. Producing this report continues to give us a good overview of merger activity in the not-for-profit sector, including both constraints on consolidation and examples of change. Towards our conclusion, we provide an update on some of the recommendations we made last year about how the sector might seek to facilitate more mergers.
Our core finding this year is that charity mergers remain rare, despite strong examples of parts of the sector responding to the need for change and two promising developments to help facilitate the progress of charity mergers. In the year for 2016/2017, 70 mergers involving 142 organisations were seen, representing about 0.09% of the sector’s 167,000 charities. Despite common discussion about duplication, 2016/17 also saw a net increase of about 1,700 (1.03%) entities registering with the Charity Commission.
Moreover, the quality of the mergers we do see is another issue. 44% of the smaller ‘transferor’ organisations (those seeking merger with similar-sized charities or being taken over) were in deficit in the year before merger. The average operating margin of ‘transferor’ charities as a percentage of their turnover was -14%. This shows that mergers are still very often sought as a form of ‘rescue’ from a position of financial and strategic weakness.
However, we note three interesting ‘hotspots’ of activity with their own unique drivers – federated charities, supported housing and mental health – and these together comprised 36% of the total of mergers in 2016/17. Interviews conducted by Eastside Primetimers with chief executives in this space uncovered how these types of organisations are partnering for impact in the face of constraints on state funding, welfare reforms, rent caps in the housing sector and regulatory pressures.
Two developments are also worth watching in the field of not-for-profit mergers. One is the new Charity Governance Code, which in the past year has gone some way towards clarifying the obligations of trustees around considering merger or closure. And Eastside Primetimers has been working with the Social Investment Business and a group of funders on the development of the Merger Turnaround Fund to support charities undertaking merger. It will be important to see whether these initiatives take off and have an impact in 2018.
We’re keen to hear feedback from you on the Good Merger Index – you can contact us here.