Experience tells us that often the educational success – or failure – of an Academy Trust (whether a MAT or a stand-alone Academy) goes hand in hand with its financial performance. So a downturn in one of these partners often leads to a downturn in the other. For example, poor educational performance may lead to reduced pupil recruitment, and therefore lower funding income. Lower funding income creates financial pressure, necessitating cost savings, which may be realised through reducing teaching resource – thereby exacerbating the underlying problem. Similarly, if finances are poorly managed, financial pressure to cut costs is created, causing knock-on impacts on educational performance. With this in mind, when contemplating a merger, finance should arguably be at the top of the list to consider, from both the perspective of the joining school and the acquiring MAT.
The acquiring MAT
From the point of view of the acquiring MAT, due regard needs to be given to schools that are, for example, in a state of disrepair and/or that have little or deficit reserves; can you really afford to bail this school out? How are capital/repairs to be paid for? Similarly, very careful consideration needs to be given to schools in a position of debt (e.g. potentially with the ESFA for funding clawbacks), and on the likelihood of any unknown debts crystallising (e.g. legal claims/ redundancies). How is this to be managed? Close scrutiny is also needed of future budgets, and key assumptions such as pupil numbers should be proactively challenged. A school need not necessarily be ruled out of a merger on the basis of finance, but perhaps a different deal ought perhaps to be brokered with the ESFA?
The joining school
From the point of view of a school joining a MAT, clarity needs to be sought in advance on the basis for central charging and the treatment of reserves on joining the MAT. The central charge is typically a “top slice” of the General Annual Grant (GAG), (though other mechanisms are gaining popularity – such as GAG pooling – see below), and the joining school needs to satisfy themselves that they can afford this. With reserves, many MATs look to pool the unrestricted reserves of joining schools. For schools with healthy unrestricted reserves, this means effectively “giving up” their rights to these funds, which can be a huge obstacle to overcome.
It is also very important for the joining school to consider how the MAT operates financially. How will the school be represented financially? How will the school access funds for special projects, such as capital expenditure? How is capital expenditure prioritised? It is therefore fundamental that the ‘due diligence’ process is two-way – a joining school should understand the financial position of the MAT it is joining, and the position of each school within it. To do this, it will be imperative to scrutinise the budget forecasts, (ideally for at least the next three years), and to understand the scheme of delegation and how much financial control will be relinquished. It would also be worthwhile to understand how any disputes are resolved, with best practice being to have a robust appeals mechanism in place.
General Annual Grant pooling
Some MATs are now choosing to ‘pool’ the key funding income for each school, General Annual Grant (‘GAG’). In a nutshell, this means that the, GAG for each school (which is based on national funding formulas) is centrally received by the MAT and then allocated to schools within the MAT on an alternative basis to that derived from the funding formula. For example, funding may be apportioned according to measures such as budgeted need, Ofsted performance, Special Educational Needs and Disabilities (SEND) needs, key performance indicators such as staffing levels, and so on. Should you be looking to a join a MAT that adopts this method, it is imperative that you are comfortable that the alternative basis of apportionment is fair and sustainable.
From a decision making perspective, for both joining schools and the acquiring MAT, it is very important that clarity is sought and provided on the methods and system of financial operations of the MAT, and that all possible eventualities are thought through. In our opinion, the optimal MAT financial model assumes a long term relationship of “give” and “take” – where, over the course of time, each school should benefit fairly from the collaboration. In this way, the concept of fairness should underpin all policies, and a longer term plan to demonstrate how each member school can benefit should be in place.
Where more autonomous practices are adopted – such as GAG and/or reserve pooling – it may also be worth managing communications with stakeholders, such as parents, as misinformation in the public domain can be very damaging.
Whether you are a ‘joiner’ or an ‘acquirer’, and whatever stage of this process that you may be at, our Academy Accounting and Advisory teams can help with initial viability reviews, due diligence services, or just general advice. We would be very happy to help.