Download a PDF version of this article here.
One of the unfortunate impacts of the coronavirus pandemic has been the cessation of services provided by a number of charities and not for profits across numerous social impact groups. At at time when the need for services is at an all time high the health risks are too great to enable some charities to continue to operate. Charities globally face enormous challenges with one of the most common being covering ongoing operational costs, such as rent and insurance, while there is no revenue being generated from services or fundraising activities. Even the Bunnings sausage sizzle is temporarily banned. As governments turn their attention to strategies to restart the economy, without undoing the good work that has been done to manage health risks, charities need ways to recover. Despite best efforts it is highly likely the charity sector will see a number of NFPs fold. Before you consider closing your charity read on for alternate options to consider.
There are approximately 57,000 charities in Australia and this number grows by approximately 4% per annum according to the Australian Charities and Not-for-profits Commission. Questions often raised with the charity regulator relate to a view there are duplicated efforts with the number of charities perceived to be doing the same work and the potential duplication of administrative burden and expense reducing social impact benefits. More than half (56%) of all Australian charities have paid staff and include universities, hospitals, non-government schools, social welfare organisation and environmental and animal protection groups. Even those charities fully run by volunteers have costs such as rent, insurance, audit fees, power and transport.
We hear of many charities that are questioning their viability post-pandemic, including those established as a memorial to a loved one who has passed. We hear of their heartbreak at the thought of not being able to continue the mission they started which is helping them to create a sense of purpose from their loss. Other charities, such as Foodbank, are seeing a significant increase in demand for services and are facing resources challenges for both supplies and volunteers. The variance in factors will result in a difference for each charity.
To make the right decision you must understand your charity’s position in your sector and environment. Who are you in your market, what role do you play in your ecosystem, and who are your main competitors for revenue and donations? You must also understand where you are headed. Can you shut down your operations and reopen unchanged after the pandemic? Can you regain lost ground? Will you be bankrupt, or can you emerge and be able to sustainably operate delivering positive social impact after the lockdown?
Now is the time to start assessing and planning a course of action pointing the way to the options you have available. It should analyse and develop in detail what you need to do today to achieve your objectives tomorrow. In the current context, the question is what you must do to get through the crisis and either go back to operating when it ends or be working towards another solution that allows the continuation of your social impact objectives. The lack of a plan only exacerbates disorientation in an already confusing situation. When drawing up the steps you intend to take, think broadly and deeply, and take a long view anchored in the purpose of your organisation.
It is quite common, in the charity sector, for organisations to run on the smell of an oily rag. The impact of that is of course that any shift to revenue or expenses can mean the difference in survival and insolvency. If your charity is facing the likelihood of needing to close there is another option you could explore and that is a merger or amalgamation.
Anchoring your decision in the initial purpose and mission of your charity will help guide your deliberations. With 57,000 charities in Australia there is bound to be some who have similar missions to yours. A merger can make charities more effective by improving existing services and creating opportunities to save on costs. The decision to merge should be driven by the principle of furthering the social impact purpose of your charity and ensuring the services your charity delivers to beneficiaries can continue.
There are different types of mergers that can occur with the most common being:
Where two or more charities join together this can often be managed by transferring assets to one organisation and winding up the other/s.
If you are considering a merger for your charity there are a number of pro's and con's to be aware of. If your primary driver is due to financial necessity one of the main benefits is the pooling of resources and reduction of administration costs. Further pro's include:
Whilst there are a number of benefits to mergers there can also be downsides which should be considered in your decision making. Some of the con's are:
If your charity has been established as a memorial to a loved one who has passed the potential loss of brand name will likely be one of the most difficult decisions faced. Where you are faced with the likelihood of closing your charity a merger, or amalgamation, may give you a way to continue to deliver the purpose you established and in turn keep the initial mission you intended alive.
Even before the Covid-19 pandemic the issue of donor fatigue was real for many charities. In Australia we have seen significant generosity towards bushfire related charities however this was at the expense of other organisations. Donors are often frustrated at the volume of calls received for donations with over a quarter of Australians receiving a call at least once a week with 90% finding the calls annoying. Feedback received by the Australian Charities and Not for Profits Commission often relates to confusion and concern from donors about the number of charities. Merging, or amalgamating, charities with similar purposes and missions would likely be positively received by donors.
You may be feeling the pressure to make a quick decision on what path to take but it is still important you undertake due diligence as part of the merger process. This allows your charity to feel comfortable prior to signing any legally binding documents. You will need to learn more detail about the other charity so you can analyse and assess important elements of their organisation.
The cost of due diligence is a proper use of NFP funds, but should be forecast and reviewed to ensure it remains proportionate to the risks involved in the potential merger. Further, the nature of due diligence checks should be proportionate to the amount of income and expenditure of the NFP; the size and nature of the proposal; and the nature of existing and planned activities. Documents that will ordinarily be exchanged during due diligence may include corporate documents; financial; fundraising documents; personnel documents; contracts; and statements regarding pending, anticipated or threatened litigation. The following are example of elements you will want to analyse:
As with the Global Financial Crisis the current coronavirus pandemic has delivered a global economic shock which economists are forecasting will be more severe than the GFC. The Australian Prime Minister, and other global leaders, have said they expect the world to look differently. Charities need to ready themselves for the future and part of that preparation may well be including a merger or amalgamation as a means of survival for the benefit of those you provide services to so your positive social impact continues.
