How to do due diligence - and top 10 tips

1. How to do due diligence - and top 10 tips Helen Elliott April 2013

2. 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”

3. Current challenges • Recession • Funding pressures • Funders require collaboration • More competition from other providers • More competitive tendering • Increasing need for your services • What else?

4. 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

5. 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?

6. 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?

7. Benefits include: • 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 • New or improved services • Access to funding • Improved services for beneficiaries • Cost savings • Knowledge, good practice and information sharing

8. 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

9. 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?

10. 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

11. 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?

12. 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

13. Backgroundand governance • Overview of external environment and competition • Organisational structure – governance and management • Review of strategic planning document and risk register

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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!

20. 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: • Trustee / staff member • Consultants • Accountants • Lawyers

21. 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?

22. 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

23. Further info… NCVO on Collaborative Working www.ncvo-vol.org.uk/collaborativeworking/ Charity Commission booklet CC34 - Collaborative Working and Mergers: An introduction Choosing to collaborate: Helping you succeed Making mergers work: Helping you succeed www.charity-commission.gov.uk/publications/ Sayer Vincent guides: Collaborative working made simple and Mergers made simple www.sayervincent.co.ukhelen@sayervincent.co.uk