MAT sponsorship and financial due diligence
July 21st, 2016 by Fiona Hotston Moore - Partner
It’s anticipated that over the next few years up to 1000 schools will be forced or “encouraged” to become academies and many of these will be sponsored by existing Multi Academy Trusts (MATs) and Academies.
Existing MATs and existing single Academies which are asked to become a MAT and to sponsor a failing school must conduct due diligence prior to agreeing to the sponsorship in order to assess exactly what they are taking on. Irrespective of the academic position of the school all MATs must conduct some financial and operational due diligence.
A thorough due diligence exercise will cover such crucial areas as academic performance, pupil numbers and capacity, legal matters, an assessment of the premises and financial due diligence. This will ensure there is a good fit between the school and the Sponsoring entity. The risk of not undertaking adequate due diligence could be to leave the MAT on the hook for substantial unforeseen educational or financial liabilities impacting adversely on the sponsoring academy or MAT. I would also advise all governing bodies to engage a firm of specialist legal advisers early in the process and to agree a fixed fee with them for the process from the initial discussions through to completion of the transfer.
In terms of the financial due diligence (FDD) this can be undertaken by the sponsoring in-house finance team if adequate resource exists. However, it can be helpful to engage independent accountants with sector experience to conduct the FDD and to report to the governing body on their findings on both the financial position and the existing financial systems and controls. Government guidance also suggests that trusts consider the use of independent accountants. Inevitably, the extraction of reliable historical financial information and preparation of financial projections is often a more challenging task in schools which are under performing and where accounting and management resource is typically weaker. There is a delicate balance to be struck between the need for the Sponsor to obtain sufficient reliable information to reach an informed judgement whilst allaying the inevitable concerns within the “target” school about the implications and process of becoming a sponsored academy.
As a minimum we suggest financial due diligence should cover the following:
- Review of financial performance for the previous three years in terms of income and expenditure as well as capital projects.
- Review of financial projections and stress testing these against historical information and industry information. Ideally future projections will cover three years.
- Consideration of financial commitments including any capital expenditure required such as boilers, roofs, asbestos removal etc. It may be possible to defer transfer until capital projects which are already approved are completed.
- Analysis of existing and ongoing staff costs including consideration of the implications of the TUPE regulations, pension costs and anticipated salary increases.
- Review of existing financial processes, the internal finance team and financial controls.
- Review of the tax and VAT implications of any additional income sources.
- Review of insurance provision and any historic insurance claims.
- Consideration of existing loans and how these will be dealt with on transfer.
- Consideration of revenue surpluses and deficits. Surpluses need to be agreed with DfE and will normally be paid to the trust post conversion. Deficits would normally be repayable however the DfE is open to discussion about a waiver of the deficit and also may consider funding restructuring costs particularly where this might be an obstacle to conversion.
- The FDD checklist should be considered alongside the legal due diligence to ensure no areas fall through the gaps and that the financial implications of matters arising in legal due diligence are quantified.
MATs and academies should also look out for the funding opportunities which are open to academies as a result of their charitable status. Grants, awards and sponsorships are made by various science and technology bodies, Sports England and other local and national charities and benefactors.
Ensors experienced corporate finance and forensics team can assist you with financial due diligence giving you peace of mind that there will be no nasty financial surprises down the road. Several of our Ensors partners are themselves members of MAT and academy governing bodies.
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