The potential for a spike in amalgamations has emerged on the back of research showing that eight-in-10 Scottish charities face cash challenges.
Growing numbers in Scotland are considering mergers as leaders face ‘difficult decisions’, charities lawyer says
Mergers in Scotland’s charities sector can be positive, proactive decisions to serve best interests rather than only being a crisis response, expert advisors said today.
Independent Scottish legal firm Lindsays, which has a specialist team advising third sector organisations, say that increasing numbers of Scottish charities are considering mergers to secure their survival as financial pressures mount.
Helen Kidd, the Partner who heads Lindsays’ Charities and the Third Sector department, believes the prospect of mergers is now even greater than it was at the peak of the coronavirus pandemic, when income plummeted as major fundraising activities collapsed.
The potential for a spike in amalgamations has emerged on the back of research showing that eight-in-10 Scottish charities face cash challenges.
Helen said: “Charities approaching mergers is something we are increasingly discussing with clients and contacts. They are operating in a really difficult environment.
“Mergers are often a last resort for survival, sometimes in response to a shock or pressures arising from contracts and commissioning services. Uncertainty over funding is having an impact in areas such as youth services and health and social care right now.
“Rising wage and National Insurance costs, strains on grant-making funders, and pressure in the public sector are among the issues compounding the challenges charities face in delivering services. Some are becoming unsustainable.”
According to SCVO, the organisation which champions the roles of charities and their positive impact in Scottish society, the voluntary / third sector in Scotland employs 136,000 people - about 6% of the national workforce.
As employers, their National Insurance (NI) contributions rose to 15% on salaries above £5,000 from April 6, alongside businesses. That was up from 13.8% on salaries above £9,100-a-year.
SCVO estimates that this has cost the sector in Scotland £78m and believes that it is directly impacting on recruitment and redundancies.
The UK National Living Wage for those aged 21 and over also increased to £12.21 per hour, up from £11.44.
“While it’s too soon to fully say what the impact of this is going to be, we know charities have much less flexibility to burden these increasing costs,” added Ms Kidd, who advises charities on a range of issues and has supported a number through mergers.
“We’re increasingly seeing senior executives, trustees and chairs having to face really difficult decisions, not just looking to the months ahead, but the years that will follow.
“In some circumstances, mergers are the answer to secure sustainability and survival.”
The most recent Scottish third sector tracker - compiled by SCVO - found that 81% of organisations reported financial-related challenges, an increase of 10% since spring 2023. Furthermore, 70% said they expected a negative financial impact from increased employer NI contributions.
Anna Fowlie, SCVO’s Chief Executive, said: “The voluntary sector is more fragile than it’s ever been, with costs rising, challenges in finding staff and volunteers and cash flow. Financial sustainability for charities, community organisations and social enterprises is a long-standing problem, but concerns over immediate cashflow have risen to the top over recent months.
“Change is inevitable, and not necessarily a bad thing. I would like to see organisations making decisions about mergers or other ways to secure their future based on the best interests of the people and causes they serve, rather than as a last-ditch crisis response.
“Our sector is a crucial part of the social and economic fabric of Scotland so its sustainability is in all our interests.”
More than half of respondents to SCVO’s tracker (54%) said their current use of reserve funding was unsustainable, up 14% since autumn 2024.
Ms Kidd said: “Heightened use of reserves is impacting on the continued survival of some charities.
“We anticipated that we might see more restructuring - more merging - in the wake of the coronavirus pandemic.
“But government support and funding then was good. Charities were crucial in the delivery of public services in that period. So it’s only now that we’re beginning to see the cracks appear.”
While mergers can often be an emergency response, Ms Kidd points out that they can also be part of a proactive strategy to expand services.
And they are not the only option for increasing reach, reducing costs or managing financial challenges.
They range from informal alliances on common activities and contract-based alliances or partnerships, to joint ventures, group or membership structures with a parent charity on top.
In all cases, trustees are advised to carry out detailed due diligence around governance, finance and employment law implications.
Ms Kidd added: “I’m a glass-half-full sort of person. We know that the charity sector is fundamentally collaborative and we’re seeing examples of charities of all kinds - albeit sometimes in crisis situations - coming together to deal with issues head-on to ensure their beneficiaries are protected.
“Merger isn’t always the answer, but charities which not only survive - but thrive - are those willing to ask themselves fundamental questions about who they are and what they’re trying to achieve.”
