Impact 101: How do social enterprise acquisitions work?

Bewildered by buzzwords? Drowning in jargon? Pioneers Post journalists and experts break down the terminology and get back to basics on impact economy concepts. Here, Alex Judd, associate director at Buzzacott accountancy and HR consulting firm, provides your Impact 101 on social enterprise acquisitions.

Why would a social business pursue an acquisition? 

Alex Judd: Mergers and acquisitions (M&A) can be driven by both buyers and sellers. An acquiring organisation is likely to be looking to scale faster to accelerate its social and financial goals. A selling organisation may be looking for support from a larger organisation so it can continue to operate, or to operate more effectively.

For both buyer and seller, the objective is usually to create social impact faster and enhance the organisation’s voice in the world. Specific objectives may be to deploy a new delivery model, acquire specialist knowledge, or expand into new geographical markets.

It takes significant ingenuity and vision to successfully transform a profitable company into a social enterprise

Delivering social impact means considering the financial elements. If two entities are able to integrate systems and improve synergies when combined, then the organisation as a whole will become more efficient. This would then directly enable it to make a greater social impact.

Successful transactions are generally those that benefit the buyer and seller, and where synergies achieved mean the whole has a higher value – and impact – than the sum of its parts.

 

What other terminology or concepts would you like to see covered in Impact 101? Let us know by contacting news@pioneerspost.com.

 

How does this compare with acquisitions in the commercial sector? 

AJ: The motivations are not the same for social enterprises as they are for corporates: a social enterprise is more likely to be looking to acquire for strategic reasons to maximise its social impact than to increase market share and ultimately profits. There are however significant overlaps (for example, greater market share and profits may lead to more social impact).

In the social enterprise sector, there are also fewer choices of potential targets to acquire, because each social enterprise has more narrowly defined objectives than organisations run for profit. It is harder therefore to find organisations with aligned long-term, strategic goals.

 

How common are social enterprise acquisitions?

AJ: It’s not that common for a social enterprise to acquire a non-social enterprise. The most significant reasons for this are usually structural in nature, such as limited availability of funds to buy a company. There can often also be huge cultural barriers where the old management team would need to buy in to the values of the new organisation and its new (social) objectives. It takes significant ingenuity and vision to successfully transform a profitable company into a social enterprise.

 

M&A GLOSSARY

Merger: two companies of a similar size are combined

Acquisition: a larger company acquires a smaller one, absorbing the business of the smaller company

Companies may be integrated in different ways:

  • Statutory: the acquirer acquires the target’s shares or assets and liabilities. After the deal, the target company ceases to exist as a separate entity
  • Subsidiary: the target becomes a subsidiary of the acquirer but continues to maintain its business
  • Consolidation: both companies in the transaction cease to exist after the deal, and a completely new entity is formed

Source: Corporate Finance Institute

 

What are the main steps in an acquisition?

AJ: Each transaction is different, but the main steps in the acquisition of a company are:

  1. Internal analysis and strategy to define business plan (growth by acquisition)
  2. Consideration of what entities could be targeted and how any acquisitions will be funded
  3. Identification of targets
  4. Approaches (of targets, but also of funders if relevant), price negotiations and signing of ‘heads of terms’ (a non-binding letter of intent)
  5. Exclusivity period for due diligence and further negotiations
  6. Completion and final signing
  7. Integration

There can also be differences in the actual mechanics of a transaction, where the acquiring entity for example acquires either 100% of the shares of an entity, or just the underlying trade and assets. The main difference between these types of transactions is that the latter generally limits the buyer’s exposure to unknown liabilities (ie debts).

 

What are the main risks for a social enterprise involved in acquiring another company?

AJ: Mergers and acquisitions can be a simple, effective strategy – but are unfortunately never a risk-free one. There are a number of risks associated with M&A in the charity, not-for-profit and social enterprise sectors:

  • Lack of alignment of mission and board buy-in
  • Poor integration of people and cultures – limited management bandwidth
  • Pension commitments including local government schemes
  • Historic tax liabilities – eg share options, IR35, VAT
  • Financial viability
  • Historic mismanagement of funds within acquired business
  • Accounting and reporting deficiencies
  • Reputational uncertainty
  • Fraud risk
  • Donor/customer/supporter retention post-transaction
  • Loss of key personnel
  • Little attention to change management in the long term
  • Unforeseen market disruptions

Mergers and acquisitions can be a simple, effective strategy – but are unfortunately never risk-free

 

How can those risks be mitigated?

AJ: The best overall strategy to mitigate these risks is to firstly consider the reasons for the transaction. There are ‘no-brainer’ scenarios where, for example, two enterprises have worked closely over many years. Higher levels of integration, alignment of mission and ‘fit’ can significantly reduce the risk of something going wrong in these cases.

Where there is greater uncertainty, both parties need to spend more time at the various milestones during the acquisition process to ensure that any disagreements and issues will be identified before it is too late.

The more factual and legal issues may require professional due diligence advice to help the parties involved to identify, understand and mitigate these risks. This enables all stakeholders to not only satisfy any statutory and legal responsibilities, but more importantly to enhance the support that the two organisations can provide to the overall cause.

 

Thanks for reading Pioneers Post. As an entrepreneur or investor yourself, you'll know that producing quality work doesn't come free. We rely on our subscribers to sustain our journalism – so if you think it's worth having an independent, specialist media platform that covers social enterprise stories, please consider subscribing. You'll also be buying social: Pioneers Post is a social enterprise itself, reinvesting all our profits into helping you do good business, better.