Cooperatives: A Tool for Community Economic Development

CHAPTER 4

STARTING A CO-OP: BASIC STEPS
 
 

THIS CHAPTER:   provides a review of steps to starting a co-op; provides an overview of keys to success; provides an overview of potential pitfalls; and offers tips for advisors.

 
 

The phases of forming a cooperative are sequential in nature and occur along a critical path.  However, each group’s journey along this path can vary or take longer than another.  Brian Henehan Cornell University

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.
 
 

Cooperative development requires both objectivity and enthusiasm.  Bill Patrie North Dakota Assn. of Rural Electric Co-ops

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.
 
 

Like any new business, a cooperative starts as a vision in the mind’s eye.  A cooperative, however, has to effectively involve a group in understanding and adopting a shared vision of what is to be accomplished.  Brian Henehan Cornell University

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:

• Is there general agreement on the nature of the problem?
• Does the cooperative form of business meet the group’s needs?
• Is there sufficient interest among potential co-op members to proceed with a feasibility study?

Are there individuals willing to serve in a leadership capacity?

TYPICAL STEERING COMMITTEE MEMBERS

1. PRESIDENT.
Often the “project champion.”  Facilitation skills a big plus.

2. VICE PRESIDENT.
May chair key subcommittee.

3. TREASURER.
Manages funds.  May lead business plan phase.  Accounting skills a big plus.

4. SECRETARY.
Coordinates all communications.  Computer skills a big plus.

5. NON-OFFICERS.

GROUP DYNAMICS (adapted from Henehan)

VARIOUS ISSUES MUST BE RESOLVED TO PROCEED:

• Potential members must see that the benefits in adopting a cooperative approach are attainable.
• Individuals must emerge who are willing to assume a leadership role and take the agreed-upon vision to the next steps.
• A level of trust and confidence must evolve within the group.
• The creative tension between visionaries and doers must be harnessed effectively.  It cannot be allowed to prevent the group from moving forward.
• Participants must be convinced that the initial risks and costs in adopting the proposed approach are outweighted by the potential benefits to be obtained.
• Roles of members, management and board members should be clear to all.
• Everyone involved should have confidence that the proposed organization is the best alternative available.

TYPICAL SUB-COMMITTEE AREAS

• Business plan committee;
• By-laws & policies committee;
• Purchasing & construction committee; and
• Personnel committee.

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:

• Is the feasibility study being conducted by qualified individuals?
• Does the feasibility study indicate that the co-op would be viable as a business?
• What are the major obstacles and opportunities the co-op will

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.
 
 

Successful cooperative development depends on a thorough study of the economic opportunity.  A feasibility study is critical to help the steering committee to understand this opportunity.  Bill Patrie North Dakota Assn. of Rural Electric Co-ops

CRITICAL QUESTIONS STEP 3 POSES:

• Given the results of the feasibility study, is there still enough interest and commitment to pursue forming the co-op?
• Are there enough potential members willing to invest the required equity to provide the co-op sufficient start-up capital?

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:

• Has the steering committee determined whether or not the co-op will issue stock?
• Has a lawyer familiar with cooperatives reviewed your co-op’s articles of incorporation and bylaws?
• Has a bank account been opened in the cooperative's name?

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.
 
d. Few steering committees have sufficient skills to develop a thorough business plan.  Obtaining technical assistance can make the difference between a business plan that gets a loan and one that does not.  Although costs vary depending on the co-op type and sector, $10,000 is not unusual for a consultant’s services in developing a business plan.  Note that many state governments offer grants and loans to assist start-ups with technical assistance and business planning.
 
 

After the best analysis has been done, [potential members] must decide:  do they believe in the business plan concept and the credibility of the steering committee, or do they think it won’t work and isn’t worth the risk?  Bill Patrie North Dakota Assn. of Rural Electric Co-ops

CRITICAL QUESTIONS STEP 5 POSES:

• Will the steering committee do the business plan themselves or will the co-op obtain technical assistance?  Or some of both?
• Does the steering committee have the necessary skills?
• Has the committee tried to obtain  grants and loans available to help pay for technical assittance?

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
members to fill out and sign.  It should identify the member’s name, address, and phone number; the number of shares of stock being purchased (or the amount of the membership fee if it is a non-stock co-op); and a stated agreement that the new member agrees to belong to and abide by the bylaws and contracts of the co-op.

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.
 

The steering committee becomes the initial champions for the proposed cooperative. Members of the steering committee ... [must] build confidence in the proposed cooperative by being the first to sign on the dotted line. Brian Henehan Cornell University

 
 

CRITICAL QUESTIONS STEPS 6&7 POSE: Is the co-op able to obtain the necessary capital through a combination of equity and debt financing? Does the co-op have sufficient member support to continue?

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 this time.
 

At this point in the development process, potential members should have all of the information they need to make an informed decision on whether to join the cooperative.  Brian Henehan Cornell University

 

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.

• Is the co-op able to indentify and recruit qualified individuals for key management positions?

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:

• the members adopt the co-op’s bylaws; and
• the members elect a board of directors for the co-op.

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.
 

Each cooperative responds to its unique economic, social and cultural context; as a result, each cooperative is unique.  Madison Principles

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.
 

Certain key elements must be present for co-ops to be successful.  These include a clear and identified need, strong local leadership, willingness to work together, dedicated board members, and good management.  Brian Henehan Cornell University

Conclusion

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
From Brian Henehan’s book Cooperating for Sustainability

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:

• Understand both the potential for and limitations of cooperation.
• Maintain objectivity and declare any potential conflict of interest.
• Insure confidentiality especially when sensitive financial information is involved.
• Build a team approach involving professionals who bring all of the needed resources to the table.
• Respect grassroots innovation and creativity. Great visions can come from unexpected places or people.
• Ask tough questions without being a wet blanket.
• Help the group identify what conditions constitute a green light to move ahead with the project or when to pull the plug.
• Keep your sense of humor.

Selecting Advisors
Criteria used for selecting advisors should include:

• level of cooperative experience,
• ability to work as a team,
• understanding of issues related to start-up organizations, and
• objectivity.

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.

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