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 company merger

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 memberoConsultantso 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 Workingwww.ncvo-vol.org.uk/collaborativeworking/Charity Commission booklet CC34 - Collaborative

Working and Mergers: An introduction Choosing to collaborate: Helping you succeedMaking mergers work: Helping you succeedwww.charity-commission.gov.uk/publications/Sayer Vincent guides: Collaborative working made

simple and Mergers made simplewww.sayervincent.co.uk helen@sayervincent.co.uk