While multi-academy trusts (MAT) will be familiar with the term ‘due diligence’, many may not fully understand what is expected of a MAT when it carries out due diligence during an academy transfer. Given that the due diligence process is an important part of risk management during an academy transfer, it is vital that MATs have the knowledge to conduct a full and thorough due diligence process when necessary.
We have set out below best practice for MATs when conducting due diligence in order that they can feel confident that they have taken the appropriate steps to manage risk when looking to expand. This will be particularly important as the government pushes to achieve its aim of all children being taught in a MAT by 2030.
Don’t be daunted
It may sound daunting, but due diligence is simply a process by which stakeholders can understand relevant information, such as costs, risks, benefits, assets, and liabilities involved in a proposed academy transfer.
The outcome of the due diligence process is beneficial to everyone involved in an academy transfer as it informs the decision of the academy proposing to transfer to the MAT – the ‘incoming academy’, the MAT, and the Department for Education. It is also a helpful step to successfully negotiate a commercial transfer agreement transferring the incoming academy’s assets and liabilities to the MAT.
Identify key information
While due diligence is in essence an information gathering exercise, it is important that the information gathered is then analysed and used to identify any risks related to the proposed academy transfer and identify solutions.
Some of the key risks and issues which the MAT should be aiming to identify and resolve include:
- Critical requirements to make the proposed academy transfer a success
- Legal and operational frameworks of the incoming academy and the MAT coming together
- The financial performance and prospects of the incoming academy
- Necessary post-transfer integration to achieve the planned benefits of the academy transfer
By identifying these key issues, the MAT board will be provided with a picture of the incoming academy’s educational and financial position, and its premises. Associated costs which will be incurred in resolving issues can then be sensibly considered before the proposed academy transfer is agreed.
Follow the two-stage approach
Due diligence is an important step in an academy transfer and should not be rushed. Some MATs allow up to six months for a full process to be undertaken, but a minimum of three months is recommended. The best approach is to carry out the due diligence process in two stages.
Stage one should be completed by the MAT during the very early stages of agreeing to the academy transfer. It is generally a lighter touch, desk-based approach, using information about the incoming academy which is readily available in the public domain. This information includes:
- Educational performance
- Ofsted reports
- Financial information available on Companies House
- Admissions information
- Capacity, pupil numbers, school demographics and pupil premium available on the Get Information About Schools website
In terms of the financial information, the financial statement which the academy trust submits to Companies House should be analysed to identify the movement in reserves and in-year position, and any trends or concerns in relation to surplus or deficits. The MAT should also consider any pension liabilities, pay rates, and key staff members.
In addition to the facts and figures, the incoming academy and the MAT should both consider whether they will be compatible in terms of ethos and culture. Even if the financial performance of the incoming academy is outstanding, the academy transfer is unlikely to be successful in the long term if the ethos and culture of the incoming academy and the MAT are at odds.
The Department for Education has produced a Stage one due diligence template to assist MATs in successfully conducting this stage of the process.
Following stage one, a decision can be taken as to whether to proceed to stage two – a full due diligence process – or whether to defer due diligence, have further discussions with the incoming academy, or whether to halt the process and not proceed.
If no deal-breaking discoveries have been made at stage one, and it has been decided to continue with the due diligence process with a view to transferring the incoming academy to the MAT, the incoming academy and the MAT will move on to stage two.
Stage 2 of the due diligence process is a far deeper dive into the incoming academy. At this stage, the MAT will be looking for information relating to the incoming academy which is unpublished and will therefore rely on the local authority and the school to provide information.
Whilst auditors can and do play a very useful part in the due diligence process, it is also important that representatives of the MAT hold conversations with key staff in the incoming trust to ensure that a collaborative approach is achieved. These conversations may include speaking with the incoming academy’s accounting officer and finance team to ask open questions to answer any concerns.
Some of the key areas which should be evaluated at stage two include:
- Staffing, including current roles, HR contracts and policies
- Educational provision, curriculum design and staffing of classes
- Current and future pupil intake expectations
- The incoming academy’s management software
- Specialist provision (if any)
- Audit information including financial, governance, health and safety audits, and ‘near misses’
- Information in respect of safeguarding, fraud or financial irregularity, and complaints
- The current insurance policy or risk protection cover for claims
The MAT should also consider seeking legal assistance during the due diligence process. We can assist with reviewing the leadership and governance of the incoming academy, its pastoral and employment policies, and considering the incoming academy’s commercial contracts.
Once stage two is completed, the MAT board will be able to make a final decision as to whether the incoming academy should join the MAT. This decision will be based on an analysis of the information which has been gathered and presented to it.
Don’t forget property
While it is easy to focus on the financial and educational aspects of the incoming academy when conducting due diligence, it is important not to forget the property aspects.
School buildings must be safe, including in respect of fire safety, weatherproof and have sufficient space, heating, lighting, and ventilation. The MAT should arrange for a detailed survey to be conducted to ensure that the incoming academy’s buildings meet these requirements, and to identify any work which may be required. It can also be helpful to assess energy consumption to identify poor insulation or other concerns.
If you require legal support with the due diligence process, please do not hesitate to contact our education team.