What is Due Diligence?

Due diligence is an investigation into the background, financial condition, business operations and contractual obligations of a person, charitable Trust or company.

Due diligence is undertaken to establish a complete, accurate and reliable vision of the subject so that realistic, fact-based decisions can be made by the investigating entity when considering any potential transaction or relationship.

Due diligence contributes significantly to informed decision-making by enhancing the amount and the quality of information available to decision-makers.

Specifically applied to Academies, it means ensuring that you fully understand all of the risks, assets, liabilities and relevant information to make an informed decision about whether entering into a Multi Academy Trust with a particular Academy is the right decision for your own organisation.

It is essential that due diligence is carried out before any decisions are formally made. It should be clearly documented that all Trustees have been made aware of this information, and that the findings are minuted in case of the need for referral at a later date.

What should be investigated under due diligence?

Due diligence is relevant to the following scenarios:

• an existing Multi Academy Trust (MAT) considering taking a new establishment into the MAT;
• an existing single Academy Trust considering joining a MAT;
• a Local Authority maintained school considering Academy conversion and joining an existing MAT;

Depending on the level of risks of the proposed merger, due diligence work could involve obtaining an understanding of:

Income and expenditure profile over a number of historical periods

• Historical budget position and any future changes that are known;
• Predicted budgetary position (assuming business as usual) for a number of forthcoming years;
• Student forecast numbers on roll and any housing development or population decline in the area;
• Scrutiny of all board meeting minutes for at least the most recent years;
• Review of all legal contracts including suppliers, leases and consultants and potential contingent liabilities (e.g. grant conditions);
• Analysis of all HR contracts including existing TUPE requirements and special conditions/clauses relating to that particular Academy;
• Inspection of the physical assets of the Academy including the condition of the buildings and facilities;
• Scrutiny of all legal documents, insurance, H&S audits, Audit outcomes, ‘Near-miss’ reports and potential liability claims;
• Scrutiny of safeguarding complaints;
• Scrutiny of Freedom of Information requests received (and responses);
• Details of any fraud or financial irregularity;
• Review of all internal processes and controls including checks as to whether practice reflects policies.

Challenges and outcomes from mergers

Bishop Fleming's specialist Corporate Finance team has advised on a variety of academy sector mergers recently. You can find out more by clicking here.