School mergers: a roadmap for success

The financial landscape for charitable independent schools is shifting. Schools are currently in the advanced stages of planning for the imposition of VAT on school fees, removal of the business rates exemption, and changes to employer National Insurance contributions (NICs). This is focusing minds and conversations on the future. For many, mergers present a promising path forward.

We have seen a steady rise in school mergers in the last six years. These take different forms. Popular models include charitable prep schools being taken on by senior schools, and the creation of new groups of schools operated by a single charity. Alternative, and sometimes innovative, structures can be successful too. We are also frequently involved in school sales where a charitable school is acquired by a commercial education provider.

Mergers are often the result of careful planning and grow organically through discussions over a lengthy time period, although they can also be sparked by crisis. Whatever the prompt, the change will mark a milestone moment for the schools involved. 

Typically, most transactions involve a school transferring its entire assets, staff, operations, and liabilities to another. Legal advice is crucial in this process. Nevertheless, for those considering a merger, having an overview of a typical transaction structure and key stages is essential. We share our key pointers and tips for success below across the five stages of most transactions.

Stage 1 - Preliminary discussions

At the outset, governors and a tight circle of senior staff members are usually speaking directly with their counterparts. Even when legal advisers become involved at subsequent stages, it remains helpful to keep direct channels of communication in frequent use. Key pointers for the preliminary stage are:

• Confidentiality: Ensure confidentiality at the outset by agreeing a non-disclosure agreement (NDA). Internally, a deed of confidentiality signed by individuals in the school’s team can help focus on confidentiality as a critical issue and alleviate concerns about information sharing.
• Internal buy-in: Assess whether key stakeholders are supportive (or likely to be supportive). If discussions are initially confined to a small group, plan how and when to involve others.
• Alignment of goals: Understand each other’s objectives. Consider cultural fit, capital investment needs and commitments regarding the premises use.

Stage 2 - Agreeing key commercial terms

Once trust is established and there is appetite on both sides to progress, it is useful to establish alignment on commercial terms and the structure of the transaction early on. At this point recommendations include:

• Early advice: Involve legal advisors before agreeing to heads of terms or a memorandum of understanding (MOU). Early input from advisors on both sides is useful to ensure advice is available on those terms and the considerations for the governors in agreeing them.   
• Strength of obligations: Determine whether obligations will be binding or framed as “best endeavours” or “reasonable endeavours.” Carefully consider the time limits of obligations.
• Exclusivity agreements: To maintain focus on the process beyond initial momentum and in order to build trust, consider including legally binding exclusivity provisions to prevent the other party from engaging with alternative prospects during negotiations.

Stage 3 - Diligence and drafting the merger agreement

This is the core of the legal work involved in the transaction. A comprehensive diligence process is vital, as the ongoing charity typically assumes all liabilities of the transferring school – past, present, and future. Similarly, the merger agreement represents a binding commitment to proceed. Momentum gathered in the early stages can often falter here while vital work is carried out, and so it is helpful to have a plan to maintain pace and motivation. Three points we would draw out are:

• Comprehensive diligence: Resist the temptation to take a light approach if you are acquiring a school. Issues including safeguarding problems or property constraints must be identified given their relevance to any decision to proceed. Seek commercial, property, and legal advice to mitigate risks and understand the business and assets.
• Resourcing diligence: Preparing responses to diligence questionnaires requires significant input from compliance, HR and finance teams. Smaller schools may need additional support to manage the workload within often tight deadlines of the merger. It is often unrealistic to expect an individual to manage this alongside the day job if it needs to happen quickly.
• Focus on key issues: Legal advisors will provide comprehensive support in drawing up the merger agreement. Address significant commercial and legal points, such as property transfer restrictions or the need for third-party consents. If commercial terms were agreed at the outset of the process, settling the agreement at this stage should be (but isn’t always) easier.

Stage 4 - From Exchange to Completion

At exchange, the merger agreement is signed and the parties become legally required to complete the merger, subject to fulfilling any pre-agreed conditions. The period between exchange and completion is pivotal for ensuring a smooth transition. Our tips include:

• Communication plans: Deliver the communications strategy through announcements to staff, pupils, parents, and stakeholders. Be prepared to adapt if unexpected issues arise.
• Department for Education (DfE) consent: Apply promptly for DfE consent to the change of Registered Proprietor. Ensure the Chair of Governors of the ongoing school is aware of their role and acts quickly to submit information for checks.
• Banking arrangements: Coordinate with banks in good time to manage financial transactions at completion, including redemption statements and fund transfers.

Stage 5 - Post-Completion

Completion of the transaction is the beginning. It marks the beginning of the two schools being run alongside each other that requires careful and considered integration planning. Points to consider:

• Integration strategy: Develop a plan to harmonise operations, culture, and practices between the schools to the extent this is advantageous. Revisit diligence reports to prioritise improvement areas and address differences in practice that require alignment.
• Dissolution of the transferor school: Plan for the eventual dissolution of the transferring school, which can take a year or more. Assign responsibility to specific board members to ensure progress, as governors of the acquired school may wish to step down post-merger.

Next steps

Our team has considerable experience advising on school mergers. If you would like to discuss any aspect further, please get in touch with Elizabeth Jones.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.