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Transitioning a business to a co-operative

Many business owners who are thinking about retirement want to make a succession plan. CIBC estimates that more than half of family businesses will change hands by 2019, but very few have a transition plan in place to guide this change. Without proper planning, small business owners may face difficulties selling their business, which could result in a loss of service and jobs for their community. In many cases, aspiring entrepreneurs lack the expertise to operate a business, or are unable to secure the necessary 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 business community and work to identify options for aging business owners. Identifying a group of people that is interested in co-operatively owning a business would ensure the community doesn’t lose services, that the business owner can retire, and wealth and jobs are retained.

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

Worker Co-op

Who better to run a business than those already work there? With a worker-owned co-operative, they can. This decision makes sense as employees likely have the expertise to operate the business, and the owner can groom 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 many of their services. A gap left by a retiring business owner could mean consumers have to travel longer distances to access 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 transfer important knowledge needed to run the business.

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, for farmers who grow fruit and vegetables it may be worth purchasing a storefront where they can sell what they grow. Ranchers may see value in forming a co-op in order 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 and are incentivized to work towards the success of the business is a great way of nurturing local ownership of services.

Steps to transitioning a business to a co-operative

Transferring a business’ ownership from an individual to a co-operative can follow a variety of paths depending on who is involved in the process. However, there are a few key steps to consider to ensure everyone is treated fairly and the transition will go smoothly:

  • Identify the shareholders. Engage the community to 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 intention. 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-operative a legal entity that can do business, and 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 require some negotiation between the co-operative and the business owner to find an agreeable value.
  • Begin transfer process. Once the co-operative 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. Making sure you get important technical information about operations, legal requirements, and strategies will help the co-op succeed. 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.

 

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