Webinar: The Lending Opportunity of a Generation, March 9, 2016

THE LENDING OPPORTUNITY

of a GENERATION Worker Coop Conversion Financing FAQs and Case Studies

Cooperative Fund of New England | Democracy at Work Institute | Project Equity

THE LENDING OPPORTUNITY OF A GENERATION

“Trillions of dollars of business value are going to change hands in the next 10 to 20 years.” Image: Bre* Ryder, The Economist

Quote: Bob Balaban, Headwaters MB, a Denver-‐based investment bank



•  FAQs for lenders about financing coop conversions • Overview of worker coop profit sharing and equity accounts

•  5 C’s of Credit applied to worker coop conversion financing

•  Five case studies of recent deals

www.project-‐equity.org/download-‐the-‐lending-‐opportunity-‐of-‐a-‐generaPon



•  Similar to financing other business sales/purchases: •  managers purchase their business •  an ESOP transacPon

• Ownership transfer process: 1.  Reorganize exisPng business as a worker coop or start new

cooperaPve business 2.  Redeem stock from owners and allocate it to new worker-‐owners 3.  ShiX governance, management, culture in line with vision for new

worker cooperaPve

Overview of the Process



Overview of the Process

EXPLORE

ASSESS • Financial feasibility study

• Opera:onal capacity analysis

PREPARE • Line up financing

CONVERT • Execute financing

SUPPORT

• Structure support into financing



•  Range of industries •  Solar companies •  Food produc:on companies •  Restaurants •  Construc:on companies •  Retail stores •  Consul:ng businesses •  Child care businesses •  Transporta:on businesses

•  Range of deal sizes •  3 – 100+ employees •  $100k – $15M value

Dozens of deals currently in the works





Technical Assistance Capital Providers Lawyers



Borrower: The worker cooperaPve • Coop decision making • Who’s liable? • AuthorizaPon to borrow: who signs for the coop?

Lender: UnderwriPng •  Five C’s of Credit •  Due diligence

Lending Basics – Worker Coops



• Coop accounPng follows GAAP •  Balance Sheet differences •  Internal Capital Accounts

•  TaxaPon in worker cooperaPves

AssetsCurrent AssetsFixed Assets and Other

Total Assets

LiabilitiesCurrent LiabilitiesLong-‐term Liabilities

Total Liabilities

EquityCapital Stock (Membership Shares)Member Deposits (Individual Internal Capital Accounts)Retained Earnings (Collective Accounts)Net Income

Total Equity

Total Liabilities and Equity

Employee Cooperative CorporationSample Balance Sheet

Coop Financial Statements


THE LENDING OPPORTUNITY OF A GENERATION Source of capital Notes

DEBT

InsPtuPons (Banks, CDFIs)

Generally requires collateral; Personal guarantees not required but helpful; Primary posiPon on all assets except inventory; Set repayment schedule

Vendors Primary lien on business inventory

Selling owner

Subordinate, oXen unsecured; Repayment conPngent on primary debt repayment

Individuals Subordinate, oXen unsecured; Repayment conPngent on primary debt repayment

EQUITY

Worker-‐owner buy-‐in VoPng shares; usually small % of sources

Accredited Investors (Private Placements)

Non-‐voPng shares; Targeted rate of return subject to coop performance

Non-‐accredited investors (Direct Public Offerings)

Non-‐voPng shares; $1,000 minimum; Targeted rate of return subject to coop performance

ContribuPons or grants No repayment required



Five C’s of Credit

5 C’s of Credit Coopera:ve Difference

Capacity Resiliency during downturns Capital Equity share structure Collateral Limit personal guarantees,

Community collateral

Character Governance and communicaPon CondiPons Coop networks and supports



5C’s of Credit: CooperaFve Differences

• Role of loan guarantees • Who may provide? •  CD-‐ or Cash-‐backed guarantees •  Limited guarantees

• Character •  Coop Culture = Ownership culture •  Governance and CommunicaPon

•  Sources of equity capital •  How equity enters and leaves the coop •  Look beyond the owners, to the community



Conversions Financing Case Studies

A Yard & A Half Landscaping

New Era Windows

Island Employee Coopera:ve

Real Pickles New School of Montpelier

Primary financing 4%, 7-‐year term loan from CooperaPve Fund of New England

5%, 10 year term loan with deferred repayment from The Working World

5.5%, 7-‐year term loan, one year interest only from a lender partnership incl. CFNE, CEI and NCB

Preferred non-‐voPng equity through a DPO with a targeted 4% dividend

6%, 5-‐year loan from CooperaPve Fund of New England

Working capital as % of total 29.1% 49.4% 19.7% 16.9% 36.5%

Equity & grants as % of total 10.6% 2.4% 0% 70.8% 0%

Seller financing as % of total 12.1% N/A 26.8% 0% 15.9%

Total financing $635,000 $850,000 $5,600,000 $749,000 $315,000



A Yard & A Half Landscaping (incorporated 2013)



Financing A Yard & A Half

Equity

Owners Equity $62,000

ContribuPons $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 AcquisiPon Working Capital $185,000 Total Uses $635,00

Equity 12%

Senior Debt 58%

Sub. Debt 30%



Island Employees CooperaFve

Island Employee CooperaPve (incorporated 2014): Board of Directors



Island Employee Coopera:ve

Bank (Senior) $1,800,000

CEI (Senior) $1,000,000

CFNE (Senior) $800,000

Seller (Sub.) $1,500,000

Associated Grocers of New England $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%

Senior Debt 63%

Sub. Debt 26%

Inv. 10%



• Connect with the Coop Network • Consider current business clients •  Finance without lending • ParPcipate in a Coop Lender’s Loan

Seize the Opportunity





CooperaFve Investment Funds

h*p://leaffund.org/

www.cooperaPvefund.org

www.theworkingworld.org

h*p://sharedcapital.coop



Dorian Gregory Cooperative Fund of New England

Copyright 2016 © Trust for ConservaPon InnovaPon, on behalf of our program, Project Equity. All rights reserved. © Project Equity and © Trust for ConservaPon InnovaPon are used interchangeably in this publicaPon for all rights deriving to Trust for ConservaPon InnovaPon

Copyright © 2016 CooperaPve Fund of New England, Project Equity, and Democracy at Work InsPtute. This work is made available under the terms of the CreaPve Commons A*ribuPon-‐NonCommercial-‐ShareAlike 4.0 InternaPonal License (CC BY-‐NC-‐SA 4.0).

Alison Lingane Project Equity Camille Kerr Democracy at Work Institute

[email protected] www.coopfund.coop

[email protected] www.project-equity.org

[email protected] www.insitute.coop

www.project-‐equity.org/download-‐the-‐lending-‐opportunity-‐of-‐a-‐generaPon

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