Sam Coutinho reminds governing bodies of their duties when involved in a merger, acquisition or collaboration

The business environment for independent schools has been challenging for a number of years although not to the extent that we are experiencing now, with VAT being applied to school fees from January, mandatory business rates relief being abolished from April, TPS employer contributions increased to just under 30% since April this year, and increased operating costs from inflation, alongside persisting geopolitical uncertainties affecting energy prices.

The cost of running a school and delivering quality education is rapidly increasing while other factors such as the lag effect of the cost of living crisis and the effect of increased interest rates on mortgages mean significant numbers of parents are finding school fees unaffordable. At the time of writing many schools are experiencing declining pupil numbers.

Governing bodies must ensure their schools are financially viable, and financially sustainable. Governors must always act in the best interest of the school, not take undue risks, and ensure the continued education of their pupils. If the school is not financially viable or sustainable they are not fulfilling their financial responsibilities and ultimately not acting in the best interest of the school. They must find a suitable solution. That said, permanent closure might be the only option, although it should be a last resort having considered all other options first.

The decision to consider a merger, sale or even closure is one of the most significant strategic decisions a board will make. Although governors are required to identify and act early if their school is in financial difficulty, many boards wait too long and options become more limited, timescales shorten and the pressure on the governors to make the best decision for the school increases.

The Charity Commission provides guidance on decision-making in its publication ‘Decision-making for charity trustees (CC27)’. The guidance sets out seven principles of decision-making that are set out by the courts. This article uses these principles as a framework for governors who are making decisions around mergers, acquisitions and collaborations.

Acting within their powers

Governors must ensure they act within the powers set out in their constitutional documents. Some transactions may require approval from the Charity Commission and the Department for Education if there is a material change. It is important that all governors understand their responsibilities regarding restructuring at the start of the process and it can be helpful for the school’s legal and financial advisors to present to the board and answer questions.

 Act in good faith and only in the interests of the school

Governors must act in the best interest of their school. To do this effectively they need to have a thorough understanding of how critical the financial situation is and recognise how the school has arrived at that point. They must understand the financial position of their school including how surplus and deficits are generated, the assets and liabilities, funds and debt. They must also understand how the financial model works and what levers are available to strengthen the model. Levers might include the potential to diversify income, liquid assets that can generate funds (although selling an income-generating asset would be unwise in the longer term) and identifying where efficiencies in processes can be achieved.

They should also understand what’s required to make the school financially viable again and sustainable in the future. It is important that they also have a clear understanding of how the school has arrived at the position it is in. Only then can they make the decision whether the school can make changes and continue to stand alone or whether it needs to consider joining a group which can provide financial and non-financial support.

In addition, and to present their school well, the governors should be able to articulate the strengths, weaknesses and opportunities for the future. Having knowledge of the school’s position in the local market if a day school, and the national and international markets, as a boarding school is also helpful.

The governors will need to be confident that it is in the best interest of the school to explore restructuring opportunities and also the type of merger, acquisition or collaboration that would be in the best interests.

Delegation and decision-making

The governing body may wish to set up a working group and delegate the detailed work and some decision-making to this group. The governors must make sure that they have the power to do this and that all governors are aware that the board remains responsible and accountable for all decisions. Members of the working group will need the appropriate skills and experience to negotiate the merger, and any conflicts of interest need to be identified and managed. The group will need terms of reference, which should set out what types of decisions can be made and when they need to report to the governors. There should also be regular meetings with the board to ensure all governors are fully briefed and feel able to make the key decisions as they arise.

Make sure you are sufficiently informed

Governors must make sure they receive sufficient information to be able to make decisions, whether those are understanding the finances, exploring or responding to potential mergers and collaborations, choosing a potential partner, or deciding on the appropriate purchase price. There are a range of decisions that will need to be made, some more complex than others, and it’s imperative that governors receive the right information and advice. For example, governors must ensure they are receiving up-to-date financial information regularly, reporting on income, expenditure, cash, cash flow and debt. They also need information from the admissions team on pupils joining, leaving and conversion rates. They need to be asking relevant questions and ensuring their decision-making is informed as best as it can be. Termly accounts may not be sufficient.

Governors are required to consider all options regarding a merger, acquisition or collaboration permitted in the constitution and select the one that will achieve the best outcomes for the pupils. They are required to take professional advice if they need to and therefore appointing legal, property and financial advisors is important. It is important to recognise that professional advice will be expensive and should be built into budgets.

A due diligence exercise will help governors to explore suitability of the partnership in terms of ethos, values and aims, finances, profile and reputation, governance arrangements, employees and pension liabilities, property ownership and legal structure. The financial, property and legal due diligence is often performed by specialist firms and will identify risk and opportunity in the potential restructure. The governors should identify red lines early as these can be the deal breakers further down the road after significant costs have been incurred. It’s also important that the governors think broadly and see all the opportunities to really strengthen their school.

Managing conflicts of interest

Governors must ensure that their personal interests or interests of persons connected to them don’t influence the decisions being made. Examples of where conflicts in schools can arise include parents or alumni who are governors. In many cases, governors initially find the concept of selling the school difficult and almost feel disloyal to the pupils and parents. Therefore, remembering that the priority must be to ensure the continued education of the pupils is imperative. 

Keep records

Governors must keep an accurate record of all decisions, which would generally be in the minutes of the meetings of the board and the working group. They should be in sufficient detail and be supported by the information used to make the decision. The governors must evidence that they have fulfilled their responsibilities regarding considering all options and choosing the option that they feel is in the best interest of the school.

Sam Coutinho is director at Sam Coutinho Consulting.

Sam Coutinho