Andrew Studd, a partner in the charity team at Russell Cooke LLP, looks at what must be considered when looking at a merger

Amid ongoing economic uncertainty, it is vital for trustees to keep their financial position under review and to be alert to any threats to their charity. However, this does not mean preserving an organisation's independence at all costs.

When income falls, one obvious way to reduce costs is to make employees redundant. This might save money in the relatively short term, but it will deprive a charity of some of its most valuable assets: its people. They will take with them knowledge and commitment, leaving uncertainly and instability among those that are left behind. Service delivery will no doubt suffer. At the same time, many overhead costs such as building leases remain static and continue to be a burden. For small and medium-sized charities, it might be difficult to reduce costs at all, and the loss of a major funding contract or grant can be enough to bring the whole operation down.

Debates about the pros and cons of mergers and the relative merits of big versus small and local versus national charities will continue. But in my view, now is the time for the trustees of some charities to accelerate discussions about their medium-term survival - bearing in mind that their primary duty is to find the most effective way to carry out their charitable purposes.

The Charity Commission is now actively encouraging charities to think about whether merger or collaboration will work for them, and it is generally willing to exercise its powers to assist in that process. For a charity in gradual decline, the alternative to merger is often premature winding up, which generally incurs significant liquidation expenses, leaving little, if anything, as a legacy. A merger can preserve and enhance a legacy, even if the charity itself disappears.

Most mergers seek to cut administration costs by centralising functions and restructuring, and as part of that process jobs are often lost. But merger is not only about reducing costs. It is also about increasing efficiency by utilising space more effectively, facilitating fundraising from two sets of potential donors, stronger purchasing power and opportunities to win larger service contracts.

It is vital to ensure that the potential benefits offered by a merger are delivered. When considering a merger, the organisations involved should carry out a certain amount of due diligence before proceeding. Due diligence serves to reveal not only the legal and financial position of the organisations involved - liabilities in respect of contracts, property leases, employees and pension schemes, in particular - but also the cultural fit between the organisations.

From this exercise, trustees can build a business plan for the merged organisation, consider its viability and then decide whether or not to proceed.

It inevitably takes time to find the right organisation, build trust and develop understanding of the benefits a merger might bring. Even when it has been agreed, further time will be needed to engage with key stakeholders and funders to reassure them that merger is in the best interests of the beneficiaries, to negotiate with landlords and other third parties and to consult staff under the Transfer of Undertakings (Protection of Employment) - Tupe - regulations.

Merger is not the answer for all organisations and is not a quick-fix solution for an already sinking ship, but you should consider whether merging is right for your organisation sooner rather than later. Once a crisis hits, time is limited and the uncertainties increase.

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