How do social enterprise acquisitions work?

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, gain access to a sustainable supply chain, acquire specialist knowledge, or expand into new geographical markets.

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.

How does this compare with acquisitions in the commercial sector? 

Megan Leonard-Moran: 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.

• Read: Six hard-earned lessons on social enterprise mergers

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.

What are the main steps in an acquisition?

MLM: 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).

• Explore more risk and sustainability issues in our Fit for the Future podcast with Tej Dhami and Zoe Portlock

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

MLM: 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, self-employed workers, 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.

Alignment of mission and ‘fit’ can significantly reduce the risk of something going wrong

How does the deal structure differ from a typical corporate acquisition?

MLM: In standard corporate M&A, financial growth metrics are key drivers for deal structures. However, social enterprise deals may require a more creative structure.

These deal structures must incorporate mechanisms that align the incentives of all parties around both financial and impact-based outcomes. For example, while a standard corporate deal might involve an earnout – where a portion of the payment depends on the business hitting certain financial targets post-acquisition – this type of structure might not fully capture the priorities of a social enterprise deal.

In traditional M&A, an earnout could specify that 30% of the valuation or purchase amount is payable if profits grow by 20% over two years. Social enterprise deals, meanwhile, might involve targets like the number of individuals served, reduction in carbon footprint, or improvements in community welfare. In these cases, an earnout might instead be linked to achieving specific impact milestones (eg delivering clean water to certain communities or providing therapy to a certain number of individuals), allowing investors to reward growth in mission-based outcomes alongside or even over financial performance. A blended structure may be preferable to balance the incentive to maintain profitability alongside impact.

How are the rise of impact investing and ESG criteria influencing mergers and acquisitions in the impact sector? 

AJ: Some sectors have a more active M&A market, including renewable energy, sustainability, education and healthcare. This is due to the need to address critical social and environmental issues and rising consumer and regulatory demands for responsible practices. For example, acquiring a social enterprise can be an effective way for a company to meet its ESG (environmental, social and governance) targets. 

The growing popularity of impact investing will create more appetite for M&A activity among social enterprises. Traditionally, investors focused on high-growth industries such as tech or finance, but they are now seeing the potential in social enterprises that can generate profit while tackling social or environmental issues. Investors can provide the resource to expand a social enterprise’s operations or refine its business model. This may lead to it being in a position to merge with or acquire a compatible organisation.

For example, a social enterprise focused on affordable healthcare tech may initially attract venture capital funding to develop its product. Once it reaches a certain scale, it could be merged with or acquired by a larger health organisation, creating value for the private equity/VC firm while allowing the social enterprise to extend its impact. This trend reflects a growing belief that social enterprises can offer robust financial returns alongside measurable social or environmental gains, appealing to an expanding pool of private equity and VC investors seeking impactful investments. 

• Alex Judd is a partner and Megan Leonard-Moran is assistant manager at accountancy and advisory firm Buzzacott. This is an updated and expanded version of a page first published in September 2021.

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