"When we embarked on the exploration of a merger with another charity, we found a myriad of issues which were costly in terms of using professionals to investigate and solve the problems. Whilst it is of course vital to use such expertise, had we had access to this comprehensive and user-friendly publication, it could have saved us a great deal of time and money at the outset."

Julie Spencer-Cingoz, British Institute for Brain Injured Children (BIBIC)

What is due diligence?

Due diligence is a term used to describe the investigative steps voluntary and community organisations (VCOs) take to assure themselves that a merger is in the best interests of their organisations and beneficiaries. The result of a due diligence exercise should be that a VCO has full knowledge of the organisation with which it seeks to merge.

Mergers have the potential to expose VCOs to a variety of risks, including additional liabilities. Trustees must comply with their legal duty to act prudently. When planning a proposed merger, trustees should ensure that they have identified any potential risks to their organisation before entering into an agreement.

Where there is a collaboration involving significant financial or reputational risks the same process may also be used.

What areas are looked at in a due diligence exercise?

The scope of due diligence varies according to the size and complexity of the organisations concerned. The checks carried out should be proportionate to the amount of risk and nature of activities involved.

The main elements of due diligence are:

1. Financial (e.g. financial history or accounting systems)
2. Legal (e.g. governing documents or contracts of employment)
3. Strategic and operational (e.g. organisational culture or IT systems)

Before commencing due diligence in any of these areas, it is important to agree the scope of the work and the arrangements for liaising with the other parties involved in the due diligence process. The organisations involved should also exchange confidentiality agreements.

Deal breakers

It is preferable to identify any major potential barriers to merger before instigating a due diligence exercise, as the external professional costs could be significant. These major potential barriers are sometimes called deal breakers, examples of which might include:

• Not having a clear business case for merging
• Incompatible objects in governing documents
• The size and composition of the new trustee board
• The name of the new entity
• Different cultures
• Pension scheme deficits

Often, through discussion, deal breakers are surmountable, and organisations can proceed to due diligence.

How much can you do in-house?

You can manage the due diligence process yourself and decide whether to bring in professionals on certain key areas. The extent to which you decide to carry out due diligence work in-house will be guided by the answers to the following questions:

• Do your trustees have the necessary expertise?
• Do the people with the expertise have sufficient time?
• Are the people sufficiently independent and objective to identify the searching questions?
• Do they have the necessary verbal, written and interpersonal skills to ask challenging questions without adversely affecting the working relationship with the prospective partner?

Due diligence provides detailed knowledge which may help build trust during the merger negotiations, and establish the foundations for trust, confidence and transparency after the merger has been completed. The exercise will increase the likelihood of trustees being able to identify and address problems at an early stage, and enhance the potential for a successful merger.

Whenever a due diligence exercise is carried out, the final responsibility for its accuracy and appropriateness rests with the trustees.

Due Diligence Demystified: What it is and how you manage it

This new publication gives clear and concise information on due diligence and how to carry it out in the most efficient and cost-effective way.

It has been written for small to medium sized voluntary and community organisations to help them understand the due diligence process and what it involves.

In particular, it will help them to:

• Decide if they have the skills, experience and capacity in-house to carry out aspects of the due diligence exercise.
• Identify tasks and documents required to carry out particular component parts of due diligence.
• Consider how best to use professional advisers.

It provides a comprehensive checklist of the areas that are typically covered in a due diligence exercise; the documentation required and the main sources of information; and the key questions that need to be asked. 

Order it now