As featured in the June/July 2021 Edition of Clubs Queensland’s Club Insight magazine.
Over the past few years there has been an increase in the number of clubs involved in mergers and acquisitions, which are usually either a merger of two similar nearby clubs or a larger successfully club taking over a small club that is struggling. There important cultural and strategic issues that a management committee needs to consider as part of these arrangements, but if an opportunity presents itself a club wants to pursue, it’s also important that legal and financial due diligence is conducted to ensure you understand what you are getting involved in.
The due diligence process often depends on the size of the assets and financial position of the parties. However, even for a small transaction, a thorough due diligence process can often save plenty of time and money down the track.
This month, we run through some key legal and financial considerations that should be front of mind for any club looking to be part of a merger or acquisition.
Crunch the Numbers
It is important to talk to your accountant and auditor about the proposed deal early in the piece. It is critical to understand the current financial health of a club you are considering merging with or acquiring, particularly its liabilities. If you are the small club that is being acquired by a larger club, it is essential for you to understand the financial position of the larger club to determine if it has the resources and ability to successfully execute the proposed strategy.
Reviewing and verifying the audited financial statements, management accounts, budgets and business plans of both clubs is critical to ensuring that the existing financial position reflects what has been represented and that the projected financial position following the merger is realistic and achievable. Whilst the clubs industry is a niche market, there are club industry experts that can analyse figures and budgets to industry benchmarks, and provide advice about the sustainability of revenue and potential for growth.
Check the Paperwork
The parties should also conduct some legal due diligence regarding the assets and the clubs involved in the transaction. In terms of the assets, this would involve reviewing title details, leases, encumbrances, zoning constraints and statutory searches of any real property, building certificates and fire safety certification of any buildings, employment issues, security interests registered over any business assets, etc. It is also important to conduct some due diligence on the other parties involved to ensure their registrations are current, they are not subject to insolvency or other court proceedings and they have complied with their constitution and have power to enter into the proposed transaction.
Merged Club Structure
Some clubs operate with a single entity (e.g. bowls clubs) whereas other clubs tend to operate using two entities (e.g. RSL Sub Branch and RSL Services Club, Football Club and Leagues Club, etc). Similarly some clubs grant all their members voting rights but other clubs have a separate class of social member with no voting rights.
As part of any merger it will be important to ensure that the proposed structure of the club and membership classes are consistent with your expectations, so this will need to be addressed at an early stage.
If your club is being acquired by a larger club, you’ll need to ensure the constitution of the other club allows for this and recognises any separate membership class and voting or other rights you are expecting to be maintained following the acquisition. Additionally, consideration needs to be given as to whether your existing club will continue to operate in its own right. When there is a merger with a larger sporting club taking on an additional site, it often for the smaller club to continue to exist as a separate incorporated association, operate its own bank account for its funds, organise its own competitions, maintain affiliation with appropriate sporting bodies such as Golf Queensland or Bowls Queensland, etc.
What Are You Signing?
To document a proposed merger, an agreement needs to be fully negotiated and executed by the parties. This can take some time to be negotiated to a position where everybody is happy with the terms before it is eventually signed, particular where it involves negotiating additional documents such as a lease, land sale, finance documents or amendments to a club’s constitution.
Decisions to progress merger discussions sometimes require a level of certainty in a quicker timeframe than a normal contract negotiation allows, so it is common for the parties to agree to basic terms and document them in a memorandum of understanding. This can be useful to clarify key terms and provide a period of exclusivity to more fully negotiate a deal, to conduct further due diligence or to consult with key stakeholders such as members regarding the merger.
If you have any questions relating to a club merger or acquisition, please don’t hesitate to contact me directly on (07) 3224 0353.