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How Mergers & Acquisitions in the Not-for-profit Sector can Unlock Value

With added compliance pressures on charities and volunteer board members rising, is it time to think about different ways for a charity to conduct its business? In this insight, we take you through the potential benefits of re-structuring your organisation in a way that may serve your charity and beneficiaries most.

How Mergers & Acquisitions in the Not-for-profit Sector can Unlock Value

With added compliance pressures on charities and volunteer board members rising, is it time to think about different ways for a charity to conduct its business? In this insight, we take you through the potential benefits of re-structuring your organisation in a way that may serve your charity and beneficiaries most.

With added compliance pressures on charities and volunteer board members rising, is it time to think about different ways for a charity to conduct its business? In this insight, we take you through the potential benefits of re-structuring your organisation in a way that may serve your charity and beneficiaries most.

Common issues for charities

Below are some examples of why charities may start thinking about a potential restructure:

  1. Some risks are increasingly difficult for charity boards to successfully manage alone.
  2. Many small charities formed in resettled religious, cultural and language-based communities look to undertake charitable works to relieve suffering in Australia and in the particular community’s country of origin but are finding the risks of operating overseas unrealistic to manage.
  3. Distributing resources directly to overseas beneficiaries can involve a massive undertaking. Even working with trusted overseas partners in high risk countries can represent a constant compliance headache under ACNC’s External Conduct Standards.
  4. In other communities there may be charity service distribution overlaps so that different charities are offering very similar relief services to meet very similar needs.
  5. Sometimes the needs being addressed appear to be more a function of a shortage of community development skills at the local level. Sometimes the very genuine will to raise funds and to do productive community work is not an effective substitute for well-designed and targeted programs to bring families and individuals out of significant social and economic disadvantage.

These problems can compound to work against sustainable economic and social development of people in genuine need in the charity’s community of origin. Meeting these challenges requires leadership and re-thinking these resourcing challenges for small community-based charities.

Have you considered a merger or an acquisition?

Merging your charity with one, two or more like-minded organisations is not a regular pathway, but it can prove beneficial for your charity and the beneficiaries involved. Restructuring your charity through a merger or acquisition of another organisation can be:

  1. a way to reduce administration expenses through economies of scale, economies of scope and synergies;
  2. a proactive move to reduce competition – as, in many cases, charities are competing with almost-identical charities for the same donor dollar.

A few ways in which a merger can occur, is where:

  1. two organisations combine, one transfers all its assets to the other and then winds up, or;
  2. both organisations combine to form a brand-new organisation, and then both of the old organisations wind up.

Meanwhile, an acquisition occurs whereby one organisation (A) takes over the assets, all the contracts and employment obligations of the other organisation (B), after which organisation B then winds up and ceases to exist.

Pooling skills, Specialising and Sharing resources

In the charities sector, co-ordination between organisations can make a massive difference to your charity’s social impact. Charities coming together are able to discuss and share their own knowledge and skills which allows for the ability to offer more services or service a larger area. For example, merging with a larger organisation can have benefits, as the larger organisation will likely already have access to tax and other concessions, deductible gift recipient endorsement and other benefits.

What is meant by synergies?

This generally means where the interaction or cooperation of two or more organisations to produce a combined effect greater than the sum of their separate effects. Charity A may be able to reach 100 beneficiaries on its own and Charity B may be able to reach 50 beneficiaries on its own; however, working together and pooling their resources may mean that they could benefit 250 beneficiaries.

What is meant by economies of scale?

This refers to the potential for more units of a good or service to be produced on a larger scale, yet with a lower costs per unit (on average).

What could this mean in the charity sector? Below is an example of that provides some perspective:

  1. Your organisation is preparing food packs for distribution in Uganda.
  2. You are currently producing 1000 food packs, and it costs you $15 per pack based on current supply and logistics arrangements.
  3. By pooling your resources (and specifically, finances) with another organisation, you may be able to:

    • Renegotiate your supply prices with providers based on your ability to acquire more products. E.g., where a rice supplier might have wanted $8 per bag of rice for 1,000 bags, they may be prepared to accept $5 per bag on the basis that you are acquiring 5,000 bags.
    • Combine logistic efforts at a larger scale. Instead of engaging a third party to ship food packs on a per delivery basis, with a larger scale – you may be able to directly acquire shipping containers/transport vehicles, allowing for overall lower logistics costs.

What is meant by economies of scope?

This is the potential for a proportionate saving gained by producing two or more distinct products/services, when the cost of doing so is less than that of producing each separately. In the charity context, an illustrative example arises as follows:

  1. Charity A assists children with disabilities in Melbourne.
  2. Charity B assists children with disabilities in Sydney.
  3. Charity A spends $10,000 per annum on marketing/advertising its products in Melbourne.
  4. Charity B spends $8,000 per annum on marketing/advertising its products in Sydney.
  5. If Charity A and Charity B were to merge, there is the potential to reduce marketing/advertising costs (among other costs) for providing services in both Melbourne and Sydney as there will be similarities in marketing strategies, product branding, and product design costs which will be spread over two services areas.
  6. Once merged, economies of scale could result in the overall marketing spend being less than $18,000.

Alternatives to mergers and acquisitions

Whilst the above benefits could arise from a merger or acquisition, there are other options that charities can explore which could include:

  1. A memorandum of understanding or a formal agreement to share resources such as premises, assets or staff;
  2. A joint venture or co-sponsoring events or programs; or
  3. Setting up a separate legal entity to undertake a joint project, or to manage a shared asset.

At Birchgrove Legal, our experienced NFP Team are able to assist parties with structuring their merger or partnership and drafting any necessary contracts, agreements or other documents along the way. It is essential to seek professional and tailored advice on any intended transactions of this nature.

Birchgrove Legal is a boutique Sydney law firm that specialises in the not-for-practice sector. Its market-leading practice is at the cutting edge of innovative approaches to serving NFP sector organisations across the spectrum of entity types. Get in touch with one of our authors to discuss your needs further.

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