webinar: the lending opportunity of a generation, march 9, 2016
TRANSCRIPT
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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
• 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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
• 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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
• 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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
Technical Assistance Capital Providers Lawyers
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
• 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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
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
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
A Yard & A Half Landscaping (incorporated 2013)
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
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%
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
Island Employees CooperaFve
Island Employee CooperaPve (incorporated 2014): Board of Directors
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
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%
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
• Connect with the Coop Network • Consider current business clients • Finance without lending • ParPcipate in a Coop Lender’s Loan
Seize the Opportunity
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
CooperaFve Investment Funds
h*p://leaffund.org/
www.cooperaPvefund.org
www.theworkingworld.org
h*p://sharedcapital.coop
Cooperative Fund of New England | Democracy at Work Institute | Project Equity
THE LENDING OPPORTUNITY OF A GENERATION
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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