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Chapter 1: Co-op Basics
Cooperation is a simple idea: two or more people join forces to accomplish something they probably couldn’t do alone. People work together in thousands of ways each day. For example, parents take turns watching one another’s children so they can do errands, work, or have time alone. Farmers traditionally helpe
d one another with barn raisings and at harvest time. By combining their efforts, sharing responsibilities, and joining forces, people are able to accomplish many things. A cooperative is a group of people who work together for economic benefit. Cooperatives bring the idea of cooperation—working together—to the business world. The cooperative idea has many applications. For instance, a group of parents might hire a teacher and rent a facility to create a preschool co-op. Individuals and families might pool their savings accounts to create a credit union. Whether cooperation happens through a cooperative or by individual action, the principle is the same. People working together can accomplish more than those working alone. What Is a Co-op? A cooperative is a business voluntarily owned and controlled by the people who use it—its members. It is operated primarily for the benefit of its members to meet their mutual needs. When many people have similar needs—such as the need for more affordable housing or for telecommunications services—cooperatives offer great potential to meet those needs. At its core, a co-op is a business, and in most states co-ops can incorporate under cooperative statutes. Cooperatives have a different ownership and investment structure than publicly traded corporations, but cooperatives are not nonprofit businesses. A cooperative has the same needs as any other business. Co-ops need sufficient financing, careful market analysis, strategic and comprehensive planning, and well-trained and competent personnel. Co-ops are not immune to the market and economic forces that cause small businesses to struggle and fail. But in several important ways, co-ops are different. Co-ops may resemble other businesses outwardly, but the fact that they are owned by members makes them unique. Here is a simple definition of a co-op: “A co-op is a member-owned, member-controlled business that operates for the mutual benefit of all members and according to common principles established for cooperatives.” More specifically:
Co-ops are owned and controlled by those who use their services (the members). Co-ops are democratically governed. Co-ops are businesses, not clubs or associations. Co-ops adhere to internationally recognized principles. There are three basic types of co-ops. Producer co-ops provide goods or services to members who make products, such as farmers or artists. Worker co-ops are owned and controlled on a democratic basis by their employees. Consumer co-ops provide goods or services used primarily by members for personal consumption. Food co-ops are typically organized as consumer co-ops. This handbook is written for those who want to start consumer-owned food co-ops. Philosophy and Principles
Co-ops worldwide share a common creed. They share a fundamental respect for all human beings and a belief in people’s capacity to improve themselves economically and socially through mutual help. This basic philosophy has been developed into a list of seven principles that serve as guidelines for how cooperatives do business. Two of the seven principles describe who owns a co-op; two describe how decisions are made; and three list specific ways that co-ops put their beliefs into action. The principles were originally developed in the mid-1800s by groups struggling to provide unadulterated, quality food at fair prices at a time when the market offered few options. As times have changed, the principles have been modified slightly, but the basic concepts have remained the same for more than 150 years. In the 1990s, the International Co-operative Alliance (ICA) reviewed the cooperative principles and reformulated them. The modern co-op principles are:
1. Open and voluntary membership (ownership)
Co-ops do not limit, for any social, political, or religious reason, who may join and become a co-owner of the co-op. Co-ops are open to all who can make use of their services and are willing to accept the responsibilities involved.
2. Member economic participation (ownership)
This principle combines many concepts, all based on the basic idea that co-ops—and their money—are owned and controlled by their members. Members provide the basic capital (money) to start and operate the co-op. If co-ops pay dividends to their member-owners, the rate must be limited. Surplus, or profit, resulting from the operations of the co-op belongs to the members, and they control how it will be distributed. If a co-op’s surplus is returned to members, it is distributed in proportion to the amount of business each member has conducted with the cooperative.
3. Democratic member control (decision making)
All co-op members have equal voting and decision-making power in the governance of the business, on the basis of one vote per member.
4. Autonomy and independence (decision making)
Cooperatives are independent, self-help organizations controlled by their members. They limit the influence of outside agencies or business partners to ensure their independence.
5. Education, training, and information (special practices)
Co-ops have an obligation to educate members about cooperative business. This mandate also encompasses educating the general public, young people, and community leaders about the nature and benefits of cooperation.
6. Cooperation among cooperatives (special practices)
To bring the theory of working together full circle, co-ops recognize the vital importance of working with other co-ops—locally, regionally, nationally, and internationally. Through these efforts, co-ops try to help each other—to strengthen their economic positions and to contribute to the co-op movement. This principle of “cooperation among co-ops” extends the idea of working together to the organizational level.
7. Concern for community (special practices)
While member needs are their primary concern, cooperatives also work for the sustainable development of their communities. In addition to reformulating the co-op principles, the ICA created the following “Statement on the Cooperative Identity.” Approved by ICA members in September 1995, the statement defines the standards by which all co-ops should operate:
Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of honesty, openness, social responsibility, and caring for others. Co-op Governance
In the corporate world, the board of directors are responsible for a corporation’s actions and for ensuring that the business is managed soundly. The co-op world is no different. The co-op board of directors is an elected body responsible for overseeing the affairs of the co-op on behalf of the owners (members). The board must act as whole; individual directors have no authority outside of board meetings, except as delegated by the board as a whole. Generally, only members in good standing may serve as directors of a cooperative. State law defines the basic roles and responsibilities of a board of directors. Most commonly, state statutes say that a board member is required to act “in good faith, in a manner he (or she) reasonably believes to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances.” All directors are required to meet this standard. Directors have three primary responsibilities:
To act as trustees on behalf of the members. Directors do this by carefully monitoring the co-op’s financial status, hiring auditors to review financial records, reporting on the status of the co-op to members regularly, and making sure the co-op follows its bylaws, policies, and appropriate regulations. To ensure sound management of the co-op. Directors are responsible for hiring and supervising the co-op’s management. Supervision includes reviewing management reports, monitoring key indicators (such as inventory turnover, sales trends, and other financial ratios), and evaluating management performance. To set long-range goals and plan for the co-op’s future. Directors do this by holding strategic planning sessions, approving yearly and long-range plans, and setting performance goals. The board is accountable to the members. It hires management, and management is accountable to the board. In some cases, directors may wish to contract with consultants or have volunteers to do some work on their behalf. Effective boards avoid micromanagement. They focus their discussions and decision making on two things:
Clearly defining results to be achieved by management or others responsible for a project
Setting limits needed to guide management’s performance
Most boards meet monthly or at regular intervals. Boards elect officers—president, vice president, secretary, and treasurer—to organize and coordinate their work. Effective boards get regular training to make sure directors understand and can fulfill their responsibilities. Boards that stay focused on providing overall direction and monitoring the co-op’s performance play a key role in the success of every co-op. Chapter 2: What Is a Food Co-op? In simplest terms, a food co-op is a business that buys food and household items for its members. The co-op helps members obtain high-quality products at the best possible price. Food co-ops offer consumers a retail environment free of coercive sales influences and with full disclosure of product quality and value. Food co-ops typically operate retail stores. Many food co-ops offer a wide range of products and services aside from groceries. These might include cooking and nutrition classes, housewares, and catering. Most food co-ops are open to anyone who wants to shop at the store, although stores may provide special services, prices, or benefits to members only. Any shopper can become a member by joining the co-op, which usually involves making a one-time equity investment. Approximately 350 food co-ops operate in the United States. The majority of these stores primarily focus on natural foods. However, a number of food co-ops offer a full line of mainstream groceries in addition to natural foods. FYI: Sources of Start-up Financing
Co-op members (membership shares, donations, loans, equity shares)
Fund-raising events
Angel investors
Self-directed IRAs
Local economic development offices
State minority and small business development offices
Local chambers of commerce
Small business development centers
USDA rural development grants and loan guarantees
USDA business and industry loan programs
FYI: The Co-op Start-up Steering Committee
The steering committee is responsible for moving the co-op through its early stages, until more formal structures can be established. Depending on time and resources, the committee may do the following tasks itself or assign these tasks to outside professionals:
Research and gather information
Conduct a preliminary feasibility study
Survey potential members
Establish a membership structure
Recruit members
Explore options for financing
Pursue initial inquiries with financing agencies
Report on progress to members
Hold membership meetings as needed
Prepare a business plan
Coordinate publicity and public relations concerning the co-op
Subcommittees might include:
A planning committee to conduct a feasibility study; research locations and eventually handle real estate negotiations; research equipment sources, local regulations, and suppliers; and coordinate preparation of a business plan
A finance committee to develop financial projections, research funding options, and coordinate a campaign for member loans
A membership committee to research membership structures, prepare information about the co-op and the paperwork needed for membership administration, coordinate recruitment of new members, organize membership communications (newsletters, websites, letters) and meetings, survey members, and plan outreach to the community
Keep in mind that certain committee tasks require a level of confidentiality, responsibility, and follow-up. Depending on what you need people to do, be clear about roles and ensuring accountability. Why Start a Food Co-op? People start food co-ops for a wide variety of reasons. Some start food co-ops for access to unique or specialized product lines. Others open co-ops when privately owned or chain food stores close in their neighborhoods. People often realize that a locally owned store will better serve consumers’ needs and will benefit the local economy and community more than a chain store. Starting a co-op is just as complex and time-consuming as starting any business. To be done properly, it can’t be rushed. Most experts estimate that starting a new co-op takes at minimum two years. As with starting any business, starting a co-op will involve thorough and careful business planning. Depending on circumstance, new co-ops will need to go through the following steps, although not necessary in the order listed:
Gather background information
Assess community interest
Incorporate
Organize within the community
Recruit members
Research feasibility
Plan for financing
Secure financing
Select a site
Prepare for opening
Begin operations
Throughout the process of planning and start-up, keep several thoughts in mind. First of all, be patient. Allow plenty of time for people to meet and discuss ideas. Community building takes time, but it will create deeper and more widespread support for your co-op. Look for resources specific to starting co-ops, including co-op development organizations, state and federal agencies, county extension offices, universities, and other local co-ops. Consultants familiar with the special laws and financial regulations applying to co-ops can provide invaluable experience and assistance. Be sure the lawyers, business planners, financial advisers, and development consultants you hire know what a co-op is and are familiar with the unique aspects of co-op operations. Also make sure to learn as much as you can about co-ops. A new co-op has a better chance of succeeding and surviving if it begins by successfully operating only a store. Deli, bakery, and juice bar operations, while appealing, require additional and specialized expertise. Be careful about spreading your limited management talent too thin at first. Don’t expand until you have experience and a successful track record to build on. Pay attention to business fundamentals. Studies have shown that the two main reasons for new co-op failure are insufficient capital and lack of business expertise. Chapter 3: Member-Ownership and Equity
All businesses need capital (money), and a food co-op is no different. There are two basic sources of capital: equity (money provided by business owners) and debt (money provided by outside sources). In a food co-op, equity most typically comes from net operating surplus (profit) and from membership investments (member equity). Debt comes from loans, including capital leases, lines of credit, mortgages, and member loans. Each kind of capital offers advantages and disadvantages. Member equity is money invested by members as owners of the co-op. Equity investments form the base capital of the co-op and may be refundable to members when they leave the co-op. When acquired properly, member equity is not a taxable source of funds for the co-op. Food co-ops use member investments to purchase equipment, expand inventory, improve facilities, pay off debt, pay deposits with suppliers, and research new services and business opportunities. In today’s economic environment, raising adequate member capital is critical to a successful start-up. Without sufficient member capital, a co-op may be unable to secure additional financing from outside sources, such as banks, suppliers, and other creditors. Supplier credit is usually limited and can lead to higher prices. Bank financing is expensive and almost always comes with some restrictions. And bankers are often reluctant to lend money to co-ops that have inadequate member-owner financing or will lend them money only at high interest rates. When a co-op has an adequate capital base, bankers are more willing to make loans at reasonable cost and without imposing constraints on the co-op’s operations or goals. In a co-op, members provide capital by purchasing shares (just like purchasing stock in a publicly traded corporation). The share purchase is a requirement of membership. Typically, the board of directors sets the amount of shares that members must purchase. Making this investment gives each member the rights and responsibilities of co-op ownership. FYI: Sample Food Co-op Membership Structure
Member share requirement: $200. This share shall be a refundable investment by members. The required share investment will be the same for individuals and households. The $200 requirement will be made up of 10 $20 shares. Joining: Upon joining, members must complete an application and pay for their shares. Members who make the full $200 investment at the time of joining will not pay a processing fee. Those who opt for the payment plan will pay a one-time $10 processing fee. Members will pay no additional fees to maintain active membership status. Payment options:
1. Purchase the full share investment ($200) at the time of joining
2. Purchase 2.5 shares ($50) and pay the processing fee for a total of $60 at the time of joining. Pay the remaining $150 in three $50 payments. Members may make investments ahead of schedule at any time with no penalty. Eligibility: Individuals and organizations are both eligible to be co-op members. Fees: Members will pay $5 for a replacement membership card, for reactivating a membership, or for repurchasing shares after termination of membership. Repurchase: The co-op will repurchase members’ shares at the board’s discretion and only when it has received replacement capital. The co-op will total all repurchase requests at the end of each month and compare that total to the amount of equity invested that month by members. If new investment equals or exceeds the repurchase total, the co-op will send checks to terminating members. If not, the co-op will process repurchase requests in the order received, up to the total amount of equity received. The co-op will not repurchase shares until it has completed one full year of store operations. Primary financial benefit: The board of directors may provide members with a patronage refund after completion of the fiscal year, depending on the capital needs of the cooperative. Other member benefits:
A vote in all co-op elections
The ability to write checks for over the amount of purchase
Member specials
A monthly newsletter
Reduced fees on co-op-sponsored classes and workshops
Eligibility for membership at a local credit union
Member Loans
Member loans can provide the co-op with a good source of financing at reasonable interest rates. At the same time, they offer members a constructive way to financially support the co-op while also earning a decent interest rate. Typically, a start-up will launch a member loan campaign after it has secured a site and recruited a substantial number of members. See “Financial Targets” in this chapter for more information about member share and equity benchmarks. When setting up a member loan program, make it clear that only current members can make loans. Establish a minimum loan amount that is worth the paperwork and cost to the co-op. A suggested minimum is $1,000, with an average loan of $5,000. Establish interest rates that are workable for the co-op while also being attractive to members. Consider interest rates that are equivalent to term CD or mutual fund rates. These rates will still be lower than what the co-op would pay for commercial loans. Give members the opportunity to loan money at various terms—with longer-term loans earning higher interest rates. Avoid member loans of less than five years unless the loans are just bridge financing until other financing can be arranged. Interest payments on member loans can be handled in different ways. Initially, the co-op may wish to suspend interest payments (that is, have interest accrue only) until after one complete year of operation. Do not pay back principal until the term of the loan has expired. Also stagger loans so they don’t all come due at the same time, which can cause serious cash-flow problems. When possible, set up a sinking fund for future repayment of loans. Member loan materials should make it clear that member loans are unsecured. This means that no collateral (equipment, for example) secures the debt. Member loans are also subordinated debt. If the co-op has to repay loans, all creditors, bankers, and suppliers will get paid first, before the member lenders. Make sure an attorney familiar with co-op securities reviews all member loan materials, including brochures, offering memoranda, and promissory notes. For more information on creating a member loan program, see Chapter 5. See also the Member Loan Toolbox from the Food Co-op Initiative: www.foodcoopinitiative.coop/resources/toolbox.
