Richard Litchfield: Mergers are worth funding - even if they don't work out

Money spent on mergers that appear to be unsuccessful is not wasted if it helps trustees make an informed decision, writes the chief executive of Eastside Primetimers

Richard Litchfield
Richard Litchfield

Third Sector has reported that the Cabinet Office awarded £95,000 in grants to two pairs of charities that explored mergers and ultimately chose not to press ahead. To some this might have raised questions about why grant money was spent on mergers that appeared to be unsuccessful –but this is completely the wrong way to look at it. The sector desperately needs more money to support mergers, not less, and we also need a strong dose of realism about what funding can achieve.

Writing for Third Sector in 2012, Richard Gutch suggested that a successful merger can cost upwards of £100,000. Even at the exploratory stages the legal, consultancy and due diligence costs are considerable. While these upfront costs seem high, the benefits far outweigh the costs when a merger is successfully implemented. Take for example, the homelessness charity St Mungo’s Broadway, which probably spent a few hundred thousand pounds last year to establish an organisation delivering services exceeding £60m annually.

Despite the benefits, there are very few funds that cover the costs of a merger. The costs are particularly onerous for small charities who may have the most to gain from a merger in terms of sustainability and strengthened impact. The Cabinet Office money is therefore a welcome exception, as is an Esmée Fairbairn Foundation fund which has provided £147,000 to organisations at the preliminary stage of merger discussions.

In a recent study we at Eastside Primetimers, which provides advice in areas including mergers among not-for-profit organisations, could only find 90 deals that took place during 2013/14 across a sector of 164,000 charities. It is surely no coincidence that merger activity remains a drop in the ocean when the available funding is still woefully small.

One of the challenges with funding mergers is that they are, by nature, complex and uncertain. Funders should adjust their expectations accordingly. If funding helps trustees make an informed decision that a proposed deal is not in the best interests of their beneficiaries, that’s a positive outcome. Esmée Fairbairn seems to have got the expectations just right, acknowledging it will consider any reasonable request…that helps to make the decision whether or not to merge easier". It is funding the process, not predetermining what that decision should be.

I believe that a more sustained source of funding in this area – probably of a few million pounds – could make a significant difference. Is it not time for interested parties across government, charitable trusts and social investors to consider the case for a dedicated merger fund? If merger activity could be doubled from today’s low level this would save thousands of jobs and protect a few hundred million pounds of services annually.

Of course mergers won’t be every funder’s cup of tea. Like early stage investing, more will be aborted than succeed as we saw in this week’s story. But funders should keep their eyes on the real prize, because if organisations can cover the costs of exploring a merger then one of the biggest barriers to charity consolidation will have been removed. The Cabinet Office should hold its nerve and keep funding efforts like this.

Richard Litchfield is chief executive of charity consultancy Eastside Primetimers

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