Cooperatives: A Tool for Community Economic Development
STARTING A CO-OP: BASIC STEPS
BECAUSE EACH SITUATION IS UNIQUE, there is no specific recipe for forming a cooperative. The steps for starting a co-op recommended here should be considered guidelines.
In addition, there may be certain circumstances unique to different
types or sectors. Suggestions specific to each sector are presented
in Part II, along with a number of case studies to demonstrate how other
cooperatives have pursued these development steps.
A. Steps to Starting a Cooperative
Like other businesses, every co-op starts with the recognition of a need or an opportunity. One or two people willing to put in some time and energy can spark a group interested in starting a co-op.
Members of such a group have a mutual need that can be addressed through joint action. They could, for example, lack a market for their products or lack necessary supplies or services. Acting together to address that need, they can achieve something which none of them could achieve alone.
As noted above, there is no recipe for starting a co-op which will work
for all situations. However, the chart on the right provides an overview
of the steps generally involved in starting a cooperative. Each step
is discussed in detail throughout the chapter.
BASIC STEPS IN STARTING A COOPERATIVE
1. Hold an organizing meeting; establish steering committee.
2. Conduct a feasibility study.
3. Hold a meeting of potential members to report on the results of the feasibility study.
4. Incorporate the co-op by filing articles of incorporation and bylaws.
5. Prepare a business plan.
6. Secure financing for the co-op.
7. Recruit members for the co-op.
8. Hire co-op management and staff.
9. Hold the co-op's first membership and board meetings.
10. Start Cooperatives.
1. Hold an organizing meeting and establish a steering committee
a. A core group of interested individuals should hold an informational meeting of potential co-op members and others in the community. The primary purpose of the meeting is to explain the identified need and how a co-op would address it.
It is important that the group come to general agreement on the nature and importance of the problem and the potential for a cooperative to address it. Such an agreement will become the group’s shared vision, so it is worth spending as much time as necessary to achieve it.
b. Provide informational handouts that explain what a co-op is and how it would work. Also provide information about the steps involved in starting a co-op so people have a sense of what they may be getting into. Determine the level of interest in exploring a co-op among meeting participants.
Many organizing groups have found it helpful to invite speakers from other cooperatives in order to highlight their success stories. This often gives meeting participants a more down to earth vision of what a co-op is and how it can work for them.
c. A steering committee should be formed of participants at the meeting which will coordinate activities on behalf of the group. Committee members must be able to provide leadership to the larger group and be willing to put some time and energy into researching the feasibility of the proposed cooperative.
d. Allow plenty of time for questions and discussion. A meeting like this often works best if it is led by an experienced facilitator. In many cases, it is necessary to hold more than one meeting to give all interested parties in the community a chance to participate.
CRITICAL QUESTIONS STEP 1 POSES:
Are there individuals willing to serve in a leadership capacity?
TYPICAL STEERING COMMITTEE MEMBERS
2. VICE PRESIDENT.
GROUP DYNAMICS (adapted from Henehan)
VARIOUS ISSUES MUST BE RESOLVED TO PROCEED:
TYPICAL SUB-COMMITTEE AREAS
2. Conduct a Feasibility study
a. The steering committee can either conduct a feasibility study (using the guidelines provided), or hire a consultant to carry out the study. The purpose of a feasibility study is to examine critical opportunities and obstacles that might make or break the proposed cooperative business. The feasibility study should give the group a good idea of whether the co-op is likely to be successful as a business.
The critical issues that a feasibility study analyzes include the number and interest level of potential members; market issues (can the co-op get better prices, better quality or better services than potential members currently get through other means?); operating costs; start-up costs; and availability of financing.
If insurmountable obstacles are discovered in the feasibility study, the development of the cooperative should be abandoned or shelved before too much time and money has been expended.
b. In some cases, local or state governments or foundations may provide financial or technical assistance with the feasibility study. The quality of the feasibility study is critical because it will influence all future decisions on the development of the co-op. Don’t hesitate to bring in outside expertise when you need it.
Contributions by potential co-op members are often used to help cover the cost of a feasibility study. These members will be the primary beneficiaries of the cooperative, so naturally they should assume some responsibility for the financial costs of assessing its feasibility.
Complete instructions for conducting a feasibility study can be found in Chapter 5 of this Manual.
CRITICAL QUESTIONS STEP 2 POSES:
3. Report on the Results of the Feasibility Study
a. The steering committee should hold a follow up meeting with potential co-op members to report on the results of the feasibility study. A summary of the feasibility report should be distributed to participants, and the full report made available to anyone who wishes to see it. Allow plenty of time to discuss the report and ensure that potential members understand the results.
b. Be sure to spend time reviewing the financial section of the report. The preliminary financial projections should tell the group how much equity will be required from each member of the co-op, and whether or not the co-op is projected to return any patronage refunds (shares of the profits) to members during the first few years of operation. These are key pieces of information that will influence each person’s decision about whether to join the co-op.
This should be a major decision point. If the feasibility study
indicates that the co-op is not a viable business, or if sufficient commitment
does not exist among the group, the steering committee should not proceed
with forming the co-op.
CRITICAL QUESTIONS STEP 3 POSES:
4. Incorporate the Cooperative and file Articles of Incorporation and Bylaws
a. In most states, a cooperative has to be incorporated under the appropriate state statute in order to conduct business. Most states have statutes specifically governing cooperatives. The articles of incorporation describe the kind and scope of the cooperative’s business. Incorporation takes place when a co-op files its articles with the secretary of state. In Wisconsin, they are filed with the Department of Financial Institutions.
If the steering committee wishes to, it may draft the articles of incorporation and bylaws. Chapter 8 of this Manual contains guidelines for drafting both of these documents. Make sure to have a lawyer who is familiar with cooperatives review these documents before they are presented to the membership.
b. The bylaws state how the cooperative will conduct business, and must be approved by the membership (see step 9 below). Note that a co-op can start out with very basic bylaws and refine them after the business plan has been developed.
c. As soon as the cooperative is incorporated and thus exists as a legal entity, two members of the steering committee should open a bank account in the co-op’s name. This account will be used to deposit equity contributions from new members.
d. A note about stock: Articles of Incorporation in Wisconsin allow the steering committee to decide whether the co-op will issue stock or not. We recommend that the co-op do so. In recruiting new members, it can be an important symbolic act to hand over a stock certificate to each individual who joins the co-op. Many new members feel more comfortable having something in hand to show for their contribution. Some potential members also find a stock cooperative easier to understand than a non-stock structure.
Blank stock certificates are available at most office supply stores. Just fill in the blanks to indicate the number of shares each member buys and the cost per share.
CRITICAL QUESTIONS STEP 4 POSES:
5. Prepare a Business Plan
a. If the feasibility study results are favorable, the steering committee carries out or hires a consultant firm to develop a detailed business plan. The business plan serves two primary purposes: to provide a blueprint for the development and initial operation of the co-op and to provide supporting documentation for potential members, financial institutions and other investors.
b. A typical outline of a business plan includes a description of the company, a market analysis, research and development related to the co-op’s product or service, a marketing and sales plan, a description of the organizational structure and key personnel, and financial data. See Chapter 6 for a complete recommended outline of a business plan.
c. In most cases, a new co-op will need to borrow capital from a bank
or other lending institution in order to get started. The business
plan serves a vital function in describing to the bank the co-op’s goals
and how it plans to accomplish those goals. Most lending institutions
will not consider a loan request that is not accompanied by a detailed
business plan. In addition, it is a very useful document when recruiting
new members to the cooperative.
CRITICAL QUESTIONS STEP 5 POSES:
A cooperative’s business plan should include many of the components of a business plan for any type of firm. However, there are additional considerations for cooperatives which should be addressed in a well thought out plan.
For example, cooperative finance involves a number of unique aspects such as the variety of ways to raise or revolve member equity. Governance structure should be spelled out in the plan to insure that an effective decision making capacity is designed. Will voting be by member, proportional to patronage, or proportional to investment? Member rights and responsibilities in relation to the cooperative should also be presented.
Financial projections should be built on several scenarios reflecting the impact of various member actions, such as a given percentage of members not meeting their patronage or investment obligations. What level of losses or prices might members be willing to tolerate? What happens if a share of members over produce or find more attractive alternatives?
6. Secure Financing
a. Cooperative businesses vary greatly in the amount of capital they need to get up and running. The business plan should include the amount and type of financing needed by the co-op and a strategy for obtaining it. The steering committee and its advisors are responsible for implementing this strategy.
b. Virtually all co-ops require some level of member financing, usually
in the form of stock purchases or membership fees. Member financing
not only provides equity for the co-op, it also provides a financial base
that helps other investors, particularly banks, feel more secure in investing
in the co-op. The steering committee should prepare a membership
application for new
Each member’s initial financial contribution should be collected at the time the membership application is submitted.
c. In addition to member equity, most co-ops need to borrow money to
get started and to maintain their operations. Loans can come from
banks and other financial institutions (including several national banks
for cooperatives). Please see Appendix A of this Manual for a list
of possible resources for financing cooperatives.
7. Recruit Members
a. Laying the groundwork for the co-op’s membership base needs to begin when the steering committee first meets. During their organizational phase, many co-ops hold meetings for potential members, conduct surveys and mail organizing updates to them, and collect initial down payments on membership fees.
All of these activities provide a good indication of the level of interest in, and commitment to, the co-op. Thus, when the time comes to actually “ante-up” and join, potential members are more primed to act. Even so, the steering committee may need to recruit new members in addition to those who have attended one or more of the organizational meetings.
This should be a major decision point. If the co-op is unable
to obtain the necessary debt financing, or if sufficient commitment does
not exist among potential members to provide sufficient equity capital,
the steering committee should not proceed with developing the co-op at
8. Hire Cooperative Management
a. Some new co-ops identify management personnel early in their organizing process, especially if one or more key individuals are already known to members of the steering committee. However, recruiting staff personnel is listed as a later step in the co-op formation process because the co-op is not a definite “go” until the necessary financing has been secured.
One or more of the key individuals can be hired as consultants at an early stage with the mutual intent that they will work for the co-op once it is formally established. This approach also has the effect of making investors feel more comfortable about financing the co-op because proposed management staff have been identified. For some lenders, competent management is the most important thing they look for in making a loan decision.
CRITICAL QUESTION STEP 8 POSES:
9. Hold Co-op’s First Membership & Board Meetings
a. After financing has been secured and sufficient members have signed up, the first general membership meeting is convened. There are two major pieces of business that must be conducted at this meeting:
Allow enough time for members to look over the bylaws and ensure that they are thoroughly understood before the vote takes place. There may be a few amendments suggested; these and the bylaws are approved by majority vote.
In their capacity as owners, members elect the board of directors to function as their representatives in overseeing the administration of the co-op. It is this mechanism through which a cooperative is member-controlled. As the members’ representatives, the board’s primary responsibilities are to develop policies, conduct long-range planning, hire and supervise the co-op manager, and guide the co-op in pursuing its mission and goals.
b. The new board of directors should hold their first board meeting
shortly after the first membership meeting. Among other duties, the
board should elect officers, develop job descriptions for management personnel,
and initiate the hiring process, if necessary.
10. Start Operations
a. During the initial phase of the co-op’s operations, management should concentrate on implementing the business plan. It is vital that frequent communication between staff, board and members be maintained during this period. Some co-ops have lost touch with their members after start-up, and have found that to be a recipe for disaster. Management and board need to make sure the co-op is meeting the needs of the members over time. Do this through regular newsletters and member surveys.
b. Another way to maintain good communication between staff, members and board is to conduct educational seminars for them. Remember that continuous education is one of the cooperative principles. It enables members to participate in the co-op’s affairs and make fully informed decisions regarding them.
A strong co-op is built on a foundation of involved members. Without
an active base of members who are willing to work towards the success of
the co-op, the co-op is bound to fail.
Starting a cooperative can be a lengthy and somewhat arduous process. It can also be very rewarding to see the fruits of your labor turn into economic and social benefits for you and your community.
The steering committee takes responsibility for seeing the organizing process through to the end. Be patient and give yourselves the time to conduct each development stage carefully.
Don’t get discouraged if the process appears to get bogged down. Bring in outside technical assistance as needed, and solicit advice from others who have been down the same road (see Appendix A).
Tips for Advisors
Professionals interested in assisting groups considering the benefits of cooperation can make a difference in improving the likelihood of success or keep the group from wasting valuable time and resources. Some considerations for those working with groups:
Seeking the advice of other groups who have formed similar organizations can be very helpful both in gaining a better understanding of what some of the pitfalls might be as well as getting referrals for good advisors. If a consulting firm is to be hired, identify at least three finalists and seek references from each of them and call each reference. Request proposals from prospective firms detailing such information as experience, work with cooperatives, work with potential competitors, plan for backup personnel support, and fee schedule. Be sure you know who in the firm will be doing the actual work.