There’s so much information out there on starting a business and growing a business. But what about when it’s time to end a business — what’s next? Selling isn’t the only option.
In 2010 Bob Moore, then the owner of Bob’s Red Mill Natural Foods, transformed his company into a co-op and transferred ownership of his company to his workers. On the heels of Moore’s 81st birthday he unveiled the Employee Stock Ownership Plan. It placed ownership of his company in the hands of the company’s 209 employees.
The company had an estimated value of $24 million. “In some ways I had a choice,” Moore told Oregon Live in 2010. “But in my heart, I didn’t. These people are far too good at their jobs for me to just sell it.”
Maybe you don’t have heirs lined up for your successful business. Maybe you are simply tired of running the show solo. Or, maybe you want to share the wealth with the people who helped you generate it. Whatever the reason, converting your business into a co-op is always a viable option. Here’s how to do it.
What are the benefits of turning your business into a co-op?
Converting a business into a co-op can be just as beneficial for owners as it can be for workers. If you’re looking for a way out, you don’t have to worry about finding a buyer who understands your business and wants to maintain its legacy.
Instead, you’re just transferring the business into collective ownership shared by the workers who know your business like the back of their hands.
As Our World by United Nations University explains, “selling a business to employees is a way to strengthen the business while getting a return on investment.”
Co-opLaw.org notes that converting to a co-op can be “an empowering decision for workers and consumers, and a realistic and sound business choice.” The website notes that co-op conversion can be great for everyone from owners to workers and even the communities that co-ops-to-be call home.
Co-ops can boost efforts to both attract top talent and keep the great employees your business already has. Co-op ownership can increase employee buy-in literally and figuratively, leading to increased employee engagement and satisfaction.
Plus, the community support they generate can help keep the business supported for years to come.
How to convert your business into a co-op: Make the right decision
No business decision is taken lightly and the decision to convert to a co-op is no exception. In fact, it’s probably one of the most consequential business decisions owners and entrepreneurs will ever make.
The best place to start is by getting solid advice. Getting advice and assistance from expert sources like Project Equity can help with the larger decision and process to convert a business into a co-op.
It can be a complex process, but luckily there are plenty of organizations like Project Equity that are ready to guide businesses through the whole thing.
Your employees have to be interested in becoming employee owners as well.
There’s more to the decision than just deciding that you, the owner, have interest in a co-op conversion. Your employees have to be interested in becoming employee owners as well.
This phase is best conducted with the help of an experienced facilitator. They can guide the necessary conversations and answer questions that come up.
Go through a co-op training and valuation
Once you and your employees make the decision to convert into a co-op, the next step is all about education. There’s a lot to do and consider that’s best done with the help of a professional.
Even before the formal transition occurs, in order to get ready for it you’ll have to start sharing the work that was previously reserved for the owner or those in leadership positions.
This can mean various things. It could mean opening up the financial books to share with employees. It could also mean determining new ways of working and governing the business.
Training and facilitation are things that will help employees to make sense of what’s needed to not only run a business, but transition into a co-op specifically.
Valuation is one of the most complex and important parts of a co-op conversion. The valuation of the business translates into the asset that the workers will own and share.
It’s essential that everyone, especially the employees, receive adequate training. That way, they can understand and participate in the valuation process.
This stage of the co-op conversion process often involves financial training for employees so that they can adequately understand the business’s valuation and what the financial options are.
Generally, businesses opt for having an independent 3rd party do the valuation. Then, employees often have the option to contest the valuation.
As Our World explains, this process and training around it “is critical to clarify the process for the owner and employees, create a structure for moving forward, and give employees the opportunity to debate the valuation so they don’t feel like they’ve been taken advantage of down the line.”
Determine how the sale will be financed
If you move forward with selling your business to your employees, chances are financing will be involved. A number of financial sources are often involved in the conversion to a co-op.
Many structure the sale as a leveraged buy-out. This is a transaction that includes a mix of equity and borrowed money for which the business’s capital serves as collateral.
Equity usually comes in the form of shares that new co-op member-owners buy. The future member-owners will likely determine how many classes of shares there will be. They will also determine how much each share will cost.
Depending on the cost of a share, there are often discussions around financing the purchase of shares for member-owners.
Then there’s the borrowed money aspect. Local credit unions, community development financial institutions, and the owner who is selling the business are common sources for this financing.
As Co-opLaw.org notes, lenders are often reluctant to completely finance a co-op buy out. For this reason, multi-stage or multi-transaction purchases can help. “In this sale structure,” the website explains, “the worker-owners secure a loan (which conceivably could come from the initial owner herself) to finance the first transaction.”
Then, after workers pay down the 1st loan, another loan is taken out to buy another segment of the business and so on.
Financing is certainly one of the most challenging parts of the process. The good part is that there are plenty of organizations that support the development of co-ops in various ways.
There are institutions that make grants to help finance co-op conversions. Nonprofits and other groups like Democracy at Work and Cooperation Works that work on co-op development also often have relationships with lending institutions that are more willing to finance co-op transactions. Help is available!
Elect board members and start running the co-op
Once the sale is either in progress or complete, it’s time to start running the business cooperatively. The new co-op will have to elect board members, typically conduct board training, and begin holding the first board meetings.
In many ways, this is just the beginning. There’s usually more training ahead and tinkering with processes and structures until they’re just right.
Communication and flexibility are key. As Joe Rinehart, the cooperative business developer at Democracy at Work told Our World, “no structure is perfect. You’re designing a human technology for participation and democratic ownership and no technology is perfect the first time out the door.”
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