INTRODUCTIONS. Cooperative Conversions: The Small Business Lending Opportunity of a Generation 11/1/2016 #OFNCONF #RETHINK

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1 Cooperative Conversions: The Small Business Lending Opportunity of a Generation Alison Lingane, Project Equity Micha Josephy, Cooperative Fund of New England Melissa Hoover, Democracy At Work Institute INTRODUCTIONS 1

2 Problem / opportunity TWIN CRISES: WEALTH GAP + SILVER TSUNAMI From The Ever-Growing Gap by the Institute for Policy Studies and CFED, g_gap-cfed_ips-final.pdf 2

3 Silver Tsunami Trillions of dollars of business value are going to change hands in the next 10 to 20 years. Image: Brett Ryder, The Economist Quote: Bob Balaban, Headwaters MB, a Denver-based investment bank 2016 Trust for Conservation on behalf of its project Project Equity Getting on the Same Page WHAT ARE WORKER COOPS AND COOP CONVERSIONS? 3

4 Worker-owned coops sit at the intersection of employee ownership and cooperatives ESOPs Employee Ownership Stock grants Worker- Owned Coops Consumer Coops Cooperatives Producer Coops Housing Coops What are Worker-Owned Cooperatives? Businesses Worker- that are Employee Cooperatives owned and Owned controlled Coops Ownership by their workers 4

5 Cooperative Home Care Associates Bronx, NY Opportunity Threads Morganton, NC 5

6 Employee ownership brings significant benefits TO WORKERS TO BUSINESSES Better pay and benefits Assets (business ownership) A voice in key decisions Higher productivity and growth Lower employee turnover Improved business longevity TO SOCIETY Local spending multiplier Higher voting levels Correlation with other social benefits All citations are in Worker Cooperatives: Pathways to Scale 2016 Trust for Conservation on behalf of its project Project Equity A coop conversion is a sale of a business Business Owner Worker Coop to a new worker cooperative Typically financed by outside lenders 2016 Trust for Conservation on behalf of its project Project Equity 6

7 Cooperative Conversion Roadmap Explore Assess Prepare Convert Support Initial learning to explore interest in pursuing Financial feasibility Employee interest Timeline and roadmap Sales agreement Financing Set up new coop Employee education Execute sales agreement Finalize bylaws and governance Training and support to ensure ongoing success DECISION TO ASSESS DECISION TO PURSUE FORMAL COMMITMENT CONVERSION TRANSACTION CULTURAL TRANSFORMATON 2016 Trust for Conservation on behalf of its project Project Equity Conversions Are Good Business Conversions Financed since 2012: 9 Businesses Plus 4 working capital lines to 100% seller financed deals $4.4 M in Loan Approvals; $2.3M in Loans Receivables Pipeline: 7 Businesses # Loans < $100 $100k - $300k > $300k Avr. Acquisition Only $197k All CFNE Debt $339k Workout $44k 7

8 Financing Sources Members Equity Voting Shares Non-Members Preferred Shares Contributions & Grants Debt Member Loans Bank Debt (inc. NCB) CDFI Debt (inc. CFNE) Seller Financing Community Loans Island Employee Cooperative 8

9 Island Employee Cooperative Debt Bank (Senior) $1,800,000 CEI (Senior) $1,000,000 CFNE (Senior) $800,000 Seller (Sub.) $1,500,000 AGNE $500,000 Total Sources $5,600,000 Purchase of Business $4,250,000 Inventory $930,000 Working Capital $175,000 Closing Costs $130,000 Technical Assistance $115,000 Total Uses $5,600,000 Equity 1% Inv. 10% Sub. Debt 26% Senior Debt 63% A Yard & A Half Landscaping Co-op 9

10 A Yard & A Half Cooperative Equity Owners Equity $62,000 Contributions $5,000 Debt CFNE (Senior) $400,000 Seller Loan (Sub.) $77,000 Friends/Family (Sub.) $91,000 Total Sources $635,000 Business Purchase $450,000 Acquisition Working Capital $185,000 Total Uses $635,000 Sub. Debt 30% Equity 12% Senior Debt 58% Underwriting Worker Cooperatives 5 C s of Credit Cooperative Difference Collateral Limit Personal Guarantees, Community Collateral, 3 rd Party Business Valuation Capital Equity Share Structure Character Worker, Management and Technical Assistance Capacity Conditions Co-op Networks and Supports Capacity No significant difference 10

11 Role of Selling Owner Staying indefinitely Staying for a fixed transition Leaving immediately How can your CDFI plug in? Deal flow today Deal flow of the future What you need to know Plugging in to the opportunity 11

12 Deal flow: today Idiosyncratic but we see some patterns 30+ deals in the pipeline right now Average size: <$1M, ~20 employees Values-aligned owners Long lead time Deal flow of the future Larger deals More standardized tools and processes Clusters: industry, geography Other clusters: Rural? Legacy businesses? Minority-owned businesses? 12

13 The power of stories Being able to talk to other selling owners is the single biggest factor in moving forward Stages of a conversion 13

14 Deal flow: what does it take? EXPLORE ASSESS STRUCTURE COMPLETE SUPPORT Pipeline, supports Move owners forward Capital needs Readiness: ownership culture Risk: management Targeted TA: cooperative design Ownership culture Professional support for the deal Valuation, legal Management capacity-building Benchmarks & ongoing assessment Finding selling owners Conventional means EXIT PLANNERS BUSINESS BROKERS 14

15 Finding selling owners New pipeline-building strategies Industry Geography Relationships and networks Communications campaign Policy supports: tax credits, funds for TA Buyers market What does this imply about where and how we look? Mapping the Providers Democracy at Work Institute Project Equity CO Coop Developers Shared Capital Cooperative Rocky Mtn Emp Ownership Ctr UW Ctr for Coops OH Emp Ownership Ctr Cooperative Development VT Emp Institute Ownership Ctr Cooperative Fund of New England ICA Group LEAF Working World NCB Capital Impact Partners 15

16 Name Type Territory Capital Impact Partners Financing National Cooperative Fund of New England Financing Regional LEAF Financing National NCB Financing National Shared Capital Cooperative Financing National The Working World Financing National (NYC) Cooperative Development Institute TA Regional Democracy at Work Institute TA National ICA Group TA National Ohio Employee Ownership Ctr TA Statewide (OH) Project Equity TA National (Bay Area) Rocky Mtn Employee Ownership Ctr TA Regional UW Center for Cooperatives TA Statewide (WI) Vermont Employee Ownership Ctr TA Statewide (VT) Mapping the Hot Spots 16

17 National collaborative Pilot Partners Business Advisors, Legal, Finance Partners Strategic power of a collaborative Develop and test models that can scale - train providers to implement the models Initiate hundreds of deals through strategic pipeline building efforts Institutionalize worker ownership as a community economic development strategy 17

18 Plugging in CDFIs: brainstorm Contact Info Alison Lingane Co-founder, Project Equity Micha Josephy Program Manager, Cooperative Fund of New England Melissa Hoover Executive Director, Democracy At Work Institute ext. 1 18