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Cooperatives: 5 steps to transfer your business to your employees
Thinking of selling your business or progressively taking your retirement? Did you know that it is possible for your team to collectively take over your business? Transferring your business to your employees in the form of a cooperative could prove to be a profitable solution for everyone involved.
To illustrate the situation in five steps, here is the story of the sale of Central Café, whose longevity now lies in the hands of a tight-knit group of employees.
It was in 2014 that the owner of Rimouski’s Central Café, Jean-Yves Beaulieu, was presented with the cooperative model as a solution to his succession issue. Mr. Beaulieu was beginning to think about retirement and selling his restaurant, established some 20 years earlier, without a specific succession plan in place. Although there are various ways to transfer a business and various cooperative models available, he opted to have his business taken over by a cooperative managed by the employees. To him, this seemed only natural, given that many of his employees had been with the restaurant for 10, if not 20 years.
The employees’ and the exiting owner’s motivations quickly lined up. For the team of employees, it meant being able to “buy” their workplace and keep it as is. For the exiting owner, it meant maintaining the essence of the café and ensuring its longevity. “We wanted Central Café to stay Central Café,” explains Nancy Dubé, General Manager and member of the cooperative.
1) Assess the company’s value
For a transaction to happen, the parties need to agree on a sale price for the business and on the type of transaction: will the buyers purchase shares or assets? “It’s the same as buying a house: each party offers a price, and negotiations ensue,” says Steve Boucher, Chair of the Board of Directors of the cooperative.
Getting experts involved in the process is crucial in order to do things right. In the case of Central Café, an appraisor assessed the market value of the business to establish a basis for negotiations. A building inspector also assessed the property.
2) Assess the team of buyers
“It’s important that the buyers know each other well and have a desire to relaunch the business, get involved to it, and manage it every day. They must also develop management skills,” explains Isabel Faubert Mailloux, General Manager of Réseau COOP, the federation of cooperatives managed by workers, which has been supporting coop entrepreneurs for more than 30 years. In fact, employees involved in the purchase of a business must have complementary expertise, as they will wear many hats. For example, at Central Café, in addition to their respective roles to ensure the restaurant runs smoothly, each cooperative member will play a part in managing the business.
3) Identify financing options
Employees often fear not being able to put together the personal downpayment necessary to finance the business transfer. They can, however, get a loan that is paid back directly through pay deductions. Keep in mind that collectively, workers have greater investment power than a single buyer; they have access to specific financing programs.
In the case of Central Café, five financial partners contributed to the project, for a loan of about $950,000. “We only needed to bring in a total of $5,000 divided among the 15 members to complete the downpayment,” says Nancy Dubé. Moreover, the workers also invest 7% of their annual pay into the business, which makes for a sound capitalization.
To complete their downpayment, the workers can seek help from financial institutions, which offer unsecured loans or capital in the form of preferred shares. “Capitalization in the form of shares is prioritized insofar that it helps improve the cooperative’s balance sheet,” explains Yvon Létourneau, Investment Manager, Cooperatives, at Desjardins Capital. It should also be noted that institutions do not require a personal guarantee in the financing of a cooperative. Rather, the risk is dependent upon the company’s assets and the quality of the buyers.
4) Update the business plan
The business plan and financial arrangement change along the way. They need to be updated based on the estimated business value and the recommendations of the various financial partners. It’s also important to update them regularly to ensure the company’s ability to keep up with the fluctuations of its environment, such as the arrival of new competitors or the emergence of a sanitary crisis.
As such, certain financial partners provide entrepreneurs with personalized recommendations to help them adapt their business model to the market. “Our partners supported us throughout the process to help us make informed decisions. Our relationship is not solely based on the financial aspects. This advisory role was especially appreciated in the context of the pandemic,” adds Steve Boucher.
5) Support the buyers
Knowledge transfer from the seller is a key success factor. In the case of Central Café, the owner stayed involved in the new cooperative, offering up a dozen hours a week for two years. This helped the new general manager fine-tune her knowledge and give her peace of mind that operations would continue to run smoothly.
You don’t need to be a natural-born entrepreneur or a seasoned manager to take over a company via the cooperative model. All employees can learn to become managers, entrepreneurs, and cooperators thanks to Québec’s extensive cooperative support ecosystem, of which Parcours COOP is part. It foster the development of these skills among worker-members.
Transferring a business to employees as a cooperative can be profitable for all parties involved. Jean-Yves Beaulieu can attest to this. Today, he is pround to see Central Café stay in operation and continue to be an economic force in the region, to the great pleasure of customers and employees alike. The buyers, for their part, can now play a greater role, and they all work together to reach their goals.
- Transfer or take over a business
- Desjardins Capital
- Transfert COOP
- Réseau COOP
- Centre de transfert d‘entreprise du Québec (CTEQ)
- Coopérative de développement régional du Québec (CDRQ)