Steps to Starting a
Cooperative
Margaret M. Bau
Cooperative Development Specialist
USDA Rural Development
January 20, 2016
Ways to Form a Co-op
Member Initiated
Incubated
Conversion
Start up idea dreamed
up and explored by the
eventual members
Start-up idea
incubated by a
development group
and transplanted
among recruited
members
Transfer an existing
business to shared
ownership
- Following a recipe
- Taking a cooking class
- Succession planning
- “Making lemonade”
Steps to take when working with a
Member Initiated Co-op
Analogy of cooking with the help of a recipe
It All Starts With…
Idea!
Could a group
effort address
the issue?
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Explore the Idea
What is the
business concept?
Is a co-op the best
structure to meet
our shared need?
Discuss the idea in a “Margaret Mead” group
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“Never doubt that a small group of
thoughtful, committed citizens can
change the world; indeed, it’s the only
thing that ever has.”
-Margaret Mead
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Gather Information
• Co-op structure
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What is a co-op?
Co-op vs other legal structures?
Other co-ops in industry and region
Co-op principles and values
Ownership culture, participatory democracy
• Discuss your mission and values
• Indentify resources
– Project coordinator (paid task master)
– Co-op and business consultants
• Define the business concept
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Key Questions
• Sound business idea?
• Advantage to work as a group
rather than alone?
– Co-op model the best structure?
• Idea worth doing?
– Time, resources, and energy
– Major difference in life?
– Business, not a hobby
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Exploratory Meeting
At your discretion, depending on the project
• Present the concept
• If interest exists, form a
STEERING COMMITTEE
• Ask for earnest money
– Cover organizing expenses
– Good indicator of commitment
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Decision Point
• If…
– Proposal is realistic
– Co-op is a possible solution
– People show interest
• Then…
– Proceed to feasibility study
• If not…
– STOP
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Conduct a Feasibility Study
• Is concept viable?
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Industry analysis
Market potential
Technical aspects
Capital requirements
Financial projections
Scenarios
• Independent analysis
– Conducted by 3rd party
Decision Point
• If…
– Concept seems viable
– After thorough review, the
steering committee wishes
to pursue the business
• Then…
– Proceed to conducting a
business plan
• If not…
– STOP
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Conduct a Business Plan
• Details of your venture
–
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Description of product
Marketing plan
Operations
Management and organization
Financial plan
Equity and capitalization
• Conducted internally
– use information from feasibility study
Decision Point
• If…
– Market potential is
sufficient
– Member participation is
sufficient
– Capitalization chances look
reasonable
• Then…
– Proceed to incorporate
• If not…
– STOP
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Legal and Policy Documents
• Draft bylaws and articles of
incorporation
– Review by co-op attorney
• Select incorporators
– usually the steering committee
– will serve as the interim board
• Incorporate with a state
• Develop policies and controls
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Your State Statutes
(or a co-op friendly state)
Accounting checks and balances
Personnel policy handbook
Membership agreements
Board policies (conflict of interest)
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Organizational Meeting
• Present findings of the
feasibility study and
business plan
– answer questions
• Adopt bylaws
• Elect Board of Directors
• Collect member equity
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Funding a Co-op
• Membership equity
– Initial
– Annual
• Transaction fees
– Per unit retains (i.e. 5% surcharge
on each item sold)
– Hourly withholding (worker co-ops)
• Equity drive
– Common stock to members
– Preferred stock
– to members and community investors
– very limited voting rights
• Subsidized loans, grants
– Loans from members
• Market rate loan
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Business Start-Up
• Immediate tasks after incorporation
– Tax ID number,
• IRS Subchapter T: “farmer co-op”
– board & business insurance
– any licenses
– workers compensation
• Hire manager
– Manager hires other employees
• Acquire facilities, equipment
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Begin Operations
This is just the beginning…
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Get Co-op on It’s Feet
• Board training - foster long term thinking
– Model good board behavior and policies
– Strategic plan
– Annual manager review
– Board self-evaluation
• Member education and involvement
– Require co-op education for membership
– Committees, conference calls
• Annual membership meeting
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Member Initiated Co-op
Follow the recipe
How about a Cooking Course?
Getting to scale in specific industries
Sectors with Cooking Shows
• Several industry sectors enjoy targeted
co-op development assistance
– Historical - Rural Electric Cooperatives
• 1935 Rural Electric Administration
• Extensive federal government loans
• Network of co-op developers and local groups
– Today - Food Co-op Initiative
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Retail natural food consumer co-ops
Extensive industry knowledge
Network of technical assistance
Limited seed money
Incubated Co-op
(of new business ventures)
Analogy of growing tomatoes in northern climates
Examples of Incubated Co-ops
(new business development)
• Co-op development in a specific industry
– Arizmendi bakeries in San Francisco, CA
• Co-op development with targeted groups
– Prospera with Latina immigrants in Oakland, CA
– Initially house cleaning, now food production
• Co-op development in a region
– Evergreen Co-ops in inner city Cleveland
• Underemployed, people with blemished records
• Anchor institution approach
– Select industries to supply local hospitals, universities
Incubating a Co-op…
• Sponsoring organization comes up
with idea:
– Picks industry, does feasibility study
– Conducts market analysis and
business plan for proposed co-op sites
– Figures out financing
– Go/No Go decision point
• If go - Sponsor recruits members to
proposed co-op
Recruiting Members
• Advertise positions
• Require co-op training
– Co-op principles
– Understanding financials
• Personal
• Business
– Democratic workplace
• Provide task specific training
• Mentor operations management
• Open for business
– Ongoing care of co-op board and membership
– Ongoing support of business
Pros and Cons of Incubated Co-ops
Strengths
• Proven industry
• Streamlined financing
• Member perspective:
– Quicker start-up
– Less burn-out of
leadership
– People with limited
business experience can
still enjoy ownership
Weaknesses
• Group trust building
process missing
• Member perspective:
– Idea isn’t from the
members
– Members may not have
deep industry knowledge
– Danger of “convenient”
membership and
employee mentality
Converting an Existing Business
to Cooperative Ownership
Examples of Conversions
• Consumer Co-ops
– manufactured home parks
• ROC USA
• Worker Co-ops
– Retiring owners (succession
planning)
• Select Machine, Kent, OH
– Current owners expanding
ownership to employees
• Real Pickles, Greenfield, MA
Ideal Environment for Conversion
• Willing seller
– Owner wants to phase out of the business
– Concerned about business legacy
– No logical successors
• Willing buyers
– Business has a major impact on their lives
• Viable business
– Profitable business, limited debt
– Industry has a future
Conversion Steps
Willingness…
Current Situation…
New Structure…
Do the Deal…
Summary
Member Initiated
Incubated
Conversion
Start up business
- Members go through
the steps of the entire
start-up process
Start-up business
- Organization does
development
process
- Hire and orient
eventual owners
Existing business
- Evaluate viability
and seller willingness
- Members go through
process steps
For More Information
Margaret Bau
Co-op Development Specialist
USDA Rural Development
(715) 345-7615 ext. 171
Margaret.Bau@wdc.usda.gov
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Crave co-op developer training?
• Cooperation Works (all co-ops)
– National network of co-op development centers and co-op
development professionals
– June 27-30, 2016, in Madison, WI
• University of Wisconsin Center for Cooperatives
• Contact Sarah Pike at info@cooperationworks.coop
• Democracy At Work Institute (worker co-ops)
– National think-and-do tank for worker co-ops
– Worker cooperative start-up webinars
• First Friday or the month through 2016
• http://institute.coop/startup
– Nonprofits interested in incubating worker co-ops
– 2016 Co-op Developer Fellowship Program