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Transitioning a Business to a Co-operative

Why think about transitioning a business to a co-operative?

Many business owners are thinking about retirement and need a succession plan, but very few have one in place. Without a plan, small business owners may have trouble selling their business, which could mean their community loses services and jobs if the business closes. Often, aspiring entrepreneurs lack the expertise to operate a business, or can’t secure the funds to buy one.

An alternative option for business owners and communities is to transition the business to a co-operative.

Communities need to think about the future of their businesses and identify options for aging business owners. Identifying a group of people that is interested in turning a business to a co-operative would help.

An important part of this process is identifying the right group of people for the buy-out. There are a variety of co-operatives to create when a business owner retires:

Worker Co-op

Who better to run a business than those who already work there? With a worker-owned co-operative, they can. Employees likely have the expertise to operate the business, and the owner can train employees to take over important parts of the business leading up to their retirement. Raising the capital to buy the business may be a challenge for workers, but issuing investment shares to non-workers (possibly other community members or businesses) could help raise funds.

Consumer Co-op

People in western Canada often rely on small businesses for their services. A gap left by a retiring business owner could mean consumers have to travel longer distances for these services. Having a stable business — and being able to keep wealth in the community —  are good incentives for customers to create a consumer co-op that can buy the business from a retiring owner. To raise money they could sell investment shares, and the first board of directors should work closely with the outgoing owner to gain knowledge they need to run the enterprise, and to turn the business to a co-operative.

Producer Co-op

In some cases, it may be a good option for those who produce goods to form a co-op to buy an existing business. Producers benefit when there is a structure in place to get their goods to market. For example, farmers who grow fruit and vegetables could purchase a storefront where they can sell what they grow. Ranchers could form a co-op to purchase an auction mart.

Multi-stakeholder Co-op

In some cases, multiple stakeholders may be interested in co-operatively owning a business. This creates an opportunity to develop a multi-stakeholder co-op that could include a combination of consumers, workers, managers, producers, or investors. Organizing a business where various groups are represented is a great way of nurturing local ownership of services.

How to transition a business to a co-operative

Transferring a business’ ownership from an individual to a co-operative can be done in different ways. However, there are a few key steps to ensure everyone is treated fairly and the transition will go smoothly:

  • Identify the shareholders. Find out if people are interested in being part of a co-operative that purchases a business. Consider the different potential groups/stakeholders listed above. Follow common steps to set up a co-operative (like hosting a community meeting, focusing your ideas for the business, and identifying potential shareholders and board members) to determine how the co-op will be organized.
  • Give notice of your plan. Talk to the business owner about your desire to buy the business, and begin working together to ensure the transfer of the business goes smoothly.
  • Develop a co-operative. Incorporate the co-operative by filing incorporation documents with the corporate registrar to make the co-op a legal entity that can do business. Begin raising the necessary funds.
  • Assess the value of the business. Determine the value of the business by working with a neutral expert, like a consultant with business plan-writing experience or who creates financial projections. (Not sure how to find one? Ask us! We can help). This process may take some negotiation between the co-operative and the business owner to find an agreeable value.
  • Begin transfer process. Once the co-op has raised enough money to buy the business, it can begin the process of acquiring assets from the business owner and transferring the business from a legal perspective (like changing ownership titles and/or licences, selling equipment, etc).
  • Transfer knowledge. Work with the outgoing business owner to transfer his/her knowledge to those leading the co-operative. Make sure you get important technical information about operations, legal requirements, and strategies. To help with this process you could hold transfer meetings, arrange for the business owner to mentor the new owners, or even have the outgoing owner serve on the co-op’s board of directors as an expert advisor.

Article: 3 ways the co-op model can save a business

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