Lawyers say third sector changes should not be viewed negatively as organisations face up to cash challenges

An increasing number of Scottish charities are exploring mergers to secure their survival amid growing financial pressures, an expert has warned. 

Helen Kidd, who heads the Third Sector team at legal firm Lindsays, expects to see greater charity restructuring emerging as organisations of all sizes grapple with managing the impact of reduced funds and rising costs.

She said: “The themes of conversations we are having in the sector are pointing to the fact that we are likely to see a number of mergers and other forms of collaboration in the not too distant future.

“Given the scale of the financial challenges that many charities face, it seems inevitable that we will see some movement, simply to secure the efficiencies which organisations need to make.

“Not only is the cost of living crisis putting pressure on fundraising - which in many cases had not bounced back after the coronavirus pandemic - but there are factors such as historic pension issues, the living wage and recruitment, on top of increased utility and fuel costs, to deal with too.

“Charities are starting to ask how they should get their house in order if they find themselves in a position where they need to make a decision about a merger opportunity - where joining forces may be the best option to support services and communities.”

Talk of mergers is growing as figures revealed by charities regulator OSCR highlighted the third sector’s huge worth to the national economy - employing almost 213,000 paid staff. Scottish charities on the Scottish Charity Register have a gross annual income of £15.1 billion.

The new Charities (Regulation and Administration) (Scotland) Act 2023 creates a register of mergers which will allow charities in the process of restructuring or merging to capture important legacy income which might otherwise be lost.

Lawyers at Lindsays, which has offices in Edinburgh, Glasgow, Dundee, Perth and Crieff, are working with a range of third sector organisations to help them deal with the vast number of issues they face, from governance and employment to building leases.

They are certain that not all change - including mergers - will be negative as charities look to make themselves more resilient to continue supporting communities and causes long into the future. 

Helen Kidd said: “Most mergers do not happen through choice. They happen because circumstances dictate it - because the most effective way forward is to pool resources.

“Our advice to those organisations who believe this may be the avenue they have to consider is firstly to be clear on your primary driver for merging and the optimum outcome desired, and, secondly, do not forget the importance of complementing organisational culture.

“As well as full-blown mergers, charities may have other collaborative options, such as sharing services or partnership.

“A merger or joint working arrangement can often be the best way to support beneficiaries and use resources efficiently. Technical, legal, governance and identity issues can generally be resolved or avoided with good advice.

“Charities can often view such changes as a solution of last resort, but trustees should not be afraid to be proactive and consider merging or collaboration as an informed choice rather than the path of last resort. This is a sector which thrives on innovation - and we see some great examples of it. Change could well be the way to ensure long-term continuity.”

Speaking after attending The Gathering in Glasgow - a major third sector conference organised by SCVO - Kate Wyatt, a partner in employment law at Lindsays who advises a number of organisations in the sector, added: “Statistics showed there were clear concerns among some about funding.

“Entering into shared services, increased collaboration or even mergers could be an option for organisations in certain circumstances. Albeit they are wise to consider all of the employment implications - from the transfer of staff to pension liabilities - as they explore their options.”

The number of people employed by charities in Scotland represents 9% of the national workforce, according to OSCR. There are 23,945 registered Scottish charities.

Half of charities are for the advancement of education (51%), the advancement of citizenship or community development represents 37% while arts, heritage, culture or science make up 24%.