Converting a business to a cooperative structure is an empowering decision for workers and consumers, and a realistic and sound business choice. , Cooperatization may be an attractive option for consumers, workers, current owners, and the communities in which the enterprise is embedded for many reasons.
Benefits of Converting and Things to do Before you Convert
Converting to a cooperative is good for the enterprise. Cooperatization can…
- Maximize innovation through collaborative teams of high-impact individuals
- Attract, retain, and reward talented individuals by distributing risk while offering direct participation in governance and surplus
- Generate wide community buy-in, thus increasing the longevity of the enterprise
Converting to a cooperative is good for the existing owner. Cooperatization can…
- Streamline an owners’ exit and maximize privacy of the transaction.
- Help an exiting owner rest easy knowing her/his venture is being stewarded by experienced, competent, invested individuals.
- Enable the existing owner to sell at a control premium
- Let the existing owner take advantage of the 1042 Rollover (to shelter their capital gains from taxation)
- Let the existing owner continue working for the business and receive internal capital allocations annually or just remain more passively involved as a debt or equity financer.
Converting to a cooperative is good for the community within and around the enterprise. Cooperatization can…
- Distribute risk and maximize institutional and community independence
- Satisfy unmet social, economic needs and correct market failures
- Provide true community ownership, buffering communities from impact of outsourcing and market centralization
- Generate, circulate, and retain community wealth
Before you start the conversion process, it is important to determine if you are ready and also get the owner’s consent.
Determine if You Are Ready
Owners’ Assent
Control of traditional capitalist businesses is in the hands of the owners. Though the impetus to cooperatize may or may not come from the owners, ultimately, the owner(s) needs to agree to the process of cooperatization, i.e. to sell the business to the new member-owners, or to sell some of the business’s assets to users (workers, consumers, or producers) seeking to create a cooperative. In some cases, owners will be excited at the prospect of conversion. In other cases, it could take years of negotiation. A recalcitrant owner certainly can refuse to permit the cooperatization of the business, and can certainly refuse to sell its assets to a cooperative comprised of its former employees. It cannot, however, stop its employees from leaving the business to create a new cooperative business for themselves.
Key decisions
- Choose your conversion approach
- Depending on how the existing entity is organized, the Steering Committee may be able to simply adjust the existing entity’s key documents, or it may have to create a new entity that then purchases the existing business/business assets.
- Assemble a team
- Those interested in becoming the owners of the new cooperatives should assemble a cooperative steering committee. In some instances, the current owner(s) will approach prospective member-owners. In other instances, prospective member-owners will convene a steering committee independently, and will then approach the owner with their desire to convert the business to a cooperative. It will be a good idea for the Cooperative Steering Committee to develop a vision or mission statement, processes for decision-making, processes for joining the Steering Committee, and expectations for those participating on the Committee.
- Appraise the business
- The Steering Committee should engage professional advisors, such as cooperative developers, lawyers, and accountants, to investigate the feasibility of a cooperative conversion, the financial health of the business, and its actual and potential liabilities.
- Choose a legal entity
- Decide what structure you want your cooperative to take and which legal entity best meets the needs of that structure.
Bringing it to life
- Identify and secure financing
- In order to purchase the business, prospective member-owners will likely need to use a variety of financial sources, and structure the transaction as a leveraged buy-out.
- Develop a governance structure
- There are potentially infinite ways to design a company’s governance, and a wide variety of ways to transition governance in the process of converting to a cooperative. There is an art to governance design, with many policies, practices, roles, and rules than can be arranged into place to produce a desired outcome.
- Sign a sales agreement
- Generally, a sales agreement will need to be negotiated and signed by the initial owners and the new cooperative entity. The agreement should includes the sale price, the list of assets being transferred, and the terms of the transfer.
- File legal and tax paperwork
- The documents required to convert a business to a cooperative will vary greatly depending on the form of business and the chosen process of conversion. Regardless of the process, there will likely be one large document that commits the parties to moving forward.. Then, to fully execute the conversion, there will usually be a variety of smaller documents to create or convert.
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