October 13, 2020

9 Considerations for Charter School Mergers in an Era of Limited Budgets

By Bellwether

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Since March, school funding experts have sought to understand how the economic turmoil coming out of the COVID-19 pandemic would affect school revenue. Most analysts agree that the impact will be significant and will be felt most by those who are the furthest from opportunity. Unfortunately, charter schools — which nationally enroll a student population that is 52 percent low-income, 25 percent Black, and 34 percent Hispanic — are particularly vulnerable to variations in state funding. 
Charter schools struggling with financial sustainability may consider whether the school’s mission might be better served by merging with another charter school. However, while charter school mergers can work, they are far from a simple solution and must be approached carefully.
As our colleagues Lina Bankert and Lauren Schwartze have previously written, a “merger” can take many shapes but, fundamentally, it involves joining together two or more organizations as one entity — through a formal legal agreement — in pursuit of a common goal. In the current financial climate, financial sustainability may be what prompts schools to explore a merger, but any merger conversation should start by defining all of the reasons why it could be a strategic move for each partner in the merger.
These nine considerations will help school leaders determine whether a merger might make sense for their school:
While a merger can support better financial efficiency in the long-term, financial efficiency is neither immediate nor guaranteed. If school leaders are pursuing a merger first and foremost because they believe it promises immediate financial benefits, they should stop and reconsider. A successful merger between two or more charter schools requires a short-term infusion of funding to support the merger process. To conduct due diligence, support internal decision making, plan implementation, and ensure a smooth transition period, school leaders will need financial resources for necessary staff time and legal expertise. Any long-term financial efficiencies will only occur after an initial up-front investment that can sometimes total hundreds of thousands of dollars.  
While a merger can increase financial strength by achieving a larger or more stable revenue base (via combined student enrollment) and by enabling some economies of scale, in practice the additional revenue is often used to support a high-quality school model, via investments to support rigorous and consistent instruction for the merged institution. As a result, a merger should not be thought of as a strategy for “saving money” per se, but instead as a way to combine resources to provide a high-quality education to more students, with the stronger financial footing that comes with that.   

Financial strain is only one of many reasons why a charter school might consider a merger; several other benefits are possible. Financial considerations may be what bring charter leaders to the table on mergers in the context of 2020, but mergers in the sector to date have often been focused on other strategic goals, like creating stronger human capital pipelines or ensuring a K-12 pathway for students. For instance, a merger can help a high-performing charter school expand the number of schools it serves, a particular benefit in places where moratoriums or other barriers to expansion exist. And when a high-performing school merges with one that is struggling, this can also expand the reach of a high-quality model and strengthen academic outcomes. 
Mergers can also help fill in human-capital pipelines by combining recruitment and training partnerships, establishing feeder patterns between schools serving adjacent grade levels (that is, if an elementary school merges with a middle school), serving as a leadership succession plan when the leader of one school is looking to move on, and enabling the school to combine resources that enable more specialized roles, such as high school courses or special education supports. 
Any partnership or merger needs to begin with thoughtful consideration by both schools about engaging communities and families in the process. This should start with identifying all key internal and external stakeholders who need to be engaged in the process. School leaders and board leaders must engage students, families, teachers, staff, board, their authorizer, and key community partners in conversations about aspirations for the school. Ideally, this occurs well in advance of any potential partnership conversation, but it is critical once a potential merger is on the table. 
For the merger to be successful for both organizations and the students they serve, school leaders will need to understand family and community perspectives on topics like availability of seats for students, location(s) of campuses, student access to a K-12 pathway, school culture, and capabilities and characteristics of school leaders. This is especially critical for stakeholders who may be disproportionately impacted by the decision or who have had negative experiences with how past decisions — at the school or in the community more generally — have been made. 
School leaders must assess their own organization and ensure it has the strength and stability to navigate a complex process. Organizations pursue mergers because they believe that the single organization that comes out of the merger will be stronger than the two separate organizations that went into it. But, while it’s in process, a merger can be a test of each individual organization’s stability. Before beginning conversations with potential partners, school leaders must take a close look at their own school to ensure it is strong enough to sustain such a significant organizational shift: 

  • Is our school strong and stable when it comes to academic, financial, and operational outcomes? Do we have the team we need, with high levels of satisfaction and retention? 
  • Is our organization and our staff aligned around a clear vision, culture, and intended impact on students and families and how we achieve it? 
  • Do we have capacity to maintain strong performance of our existing school(s) while simultaneously investing meaningful amounts of time and effort on a merger?
  • Are we ready and willing to stumble through challenges and setbacks, some of which we will not be able to anticipate? 
  • Do we have the right skill sets to take this on, such as project management and change management?
  • Do we have broad and diverse support from and relationships with our families and communities, a base from which we can gather input on and generate support for a new path forward for our organization?

School leaders must consider the schools with whom they might merge, and conduct early due diligence to understand areas of incompatibility, potential benefits, and risks. A robust due diligence process will support an early assessment of the viability of a merger, begin to build trust and communication between the two schools, and minimize the surprises that crop up throughout the merger process. School leaders should seek to understand as much as possible about the school with which they may merge, including:

  • Basic information about the school, such as its founding story and mission statement
  • How the school is governed and operates, including its board membership/engagement and policy handbooks
  • The school’s academic program and performance
  • The number of employees and their roles and responsibilities
  • School financials, including audited financial statements, budgets, tax documents, and fundraising
  • The school’s physical property, including owned or leased facilities

In 2020, it will be especially important to understand how the school has navigated the numerous crises that have affected the country, including how the school has ensured high-quality and equitable learning options for students during the pandemic as well as how the school has supported its community in response to recent events of racial injustice. 
This due diligence process will help schools make an early assessment of whether it makes sense to continue exploring a merger. For instance, misaligned missions might be a deal breaker, while unstable financials could be a manageable risk. 
Clearly define how a merger could benefit both organizations and their students. Once school leaders have assessed their own schools and the school with which they seek to merge, the next step is to analyze, identify, and clearly articulate how the two organizations can complement each other and why a merger is a strategic move for both organizations. The leadership of both schools must come together to answer some important questions: 

  • How will the merger benefit the students and communities served, as well as the broader sector? Could a merger benefit or disadvantage some groups differently than others?  
  • Why is a merger a strategic move for each partner school? Do the reasons or motivations of each school reveal any misalignment?  
  • What are the primary benefits each partner seeks to gain from this merger? Why is the envisioned future state better than the current state?
  • What challenges does each partner bring to the merger (e.g., academic performance, facility access/stability/debt)? Is there a clear path to solving these challenges through a merger?
  • Are there any factors either partner is unwilling to move on (e.g., school model, school name)? Do any of those factors diminish the value or benefit of the merger?

In navigating an organizational shift like a merger, not only is a building-level leader needed to run the process but a leader from the school’s governing board and a leader to carry the vision forward for the schools, once merged, are also necessary. Each school engaged in a merger must ensure that both organizations have the leadership to guide through a merger as well as to lead the new organization after the merger. These leaders must not only truly believe in the potential of the merger, but have the extra skill and nimbleness to lead their organizations through change. The leaders must have a track record of running great schools, be relentless in their pursuit of success for students, be willing to work through ambiguity, be willing to fail (sometimes publicly) and to adapt and learn, be able to effectively identify when it is important to go fast and when it is important to go slow, have a vision for the organization that the leader can communicate effectively to a range of stakeholder groups, and be effective in having difficult conversations about key decisions and trade-offs. 
Successful mergers will also have a strong academic leader who can develop and implement the instructional vision for the school moving forward, as well as one or more board members who are willing to partner with and support the schools through change. 
If the leaders and/or board of each school are managing a merger across lines of difference (e.g., race, ethnicity, age, gender) it will be particularly important to understand how the leadership transition for the new, merged organization may be experienced by stakeholders. 
School leaders must evaluate the external environment, including authorizer policies, charter school politics, or other factors that could affect the success of a merger. Even with the best laid plans for stakeholder engagement and change management, mergers can go sideways because of factors outside the schools’ control. For instance, charter school laws were rarely written with mergers in mind and, while not prohibited, they require an authorizer that is willing to be creative and establish new processes. Authorizers may also be able to support successful mergers by providing a transition period for schools in their charter terms or accountability ratings. 
Of course, any substantial shift in schooling can influence or be influenced by the politics of charter schooling or other community- or education-related issues. School leaders should assess the community’s support for charter schools, other issues affecting the community that might intersect with a merger (such as school segregation), and the degree of support or opposition they might expect from local policymakers. 
While these factors may be outside of the schools’ control, being aware of potential challenges from the start will help the schools’ navigate any challenges that arise. 
Last but not least, school leaders should reach out to those who can advise them in their exploration of a merger. While mergers are not particularly common in the charter sector, there have been some — and some have been more successful than others. School leaders can benefit from hard-won lessons from their peers across the country. To connect with those who have done this work, school leaders should reach out to: 

  • Charter school support organizations, such as charter associations, intermediaries, or back-office support providers. These organizations may have engaged with school leaders in their region who have pursued mergers (or potential mergers).
  • Authorizers generally must approve the amendments to schools’ charter that result from a merger, so will typically have insight not only into the mergers that have taken place, but also the legal intricacies of the process. In some cases, authorizers may even help facilitate the merger of a school that is struggling with one that is high-performing. 
  • Funders, who often have a seat at the table in understanding what goes into a merger because they are supporting some or all of the upfront investment. 

When confronting questions about the future of their schools, mergers are one of many tools at a school leader’s disposal. However, mergers are tricky partnerships that are not for the faint of heart. We hope leaders considering this option proceed with caution, and that the considerations above help assess whether a merger is an option that can, ultimately, provide more students with a high-quality education. 
Read the rest of our series, “The Looming Financial Crisis?,” here

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