B.C. TRANSITION TOOLKIT FOR NON-FAMILY FARM TRANSFER – Stage 2
Transition to Co-Operative Ownership
A co-operative (co-op) is a type of business that is member-owned, and democratically managed. Co-ops are established and run by their owner-members, operating on the idea that people can work together to meet their shared goals and needs. Co-ops pool the resources of members to help the collective achieve goals they would not necessarily have been able to achieve on their own. Co-ops are different from other types of businesses in two main ways:
The co-operative model is values-based, and all co-ops align themselves to a set of internationally agreed upon values and principles: self-help, self-responsibility, democracy, equality, equity, and solidarity.
A co-op is distinguished from other businesses in that who benefits from the activities of the co-op is ingrained in the structure. Where typical businesses operate to generate a profit for a few shareholders, co-op members all benefit from the success of the business. Furthermore, co-op members are all equal decision-makers, with a one member/one vote policy, rather than one share/one vote, which ensures a co-op acts in its members’ best interests. In a producers’ co-op, for example, farmers own the co-op and will always have control over and benefit from the co-op’s activities.
Collaboration in farming is highly valued not only for sharing the farm work, but also for sharing the financial burden in accessing land, equipment and infrastructure with the pooled resources of a group. The flip side is the work required by members to build and maintain strong interpersonal relationships that can navigate differences of opinion and achieve consensus. Members of a co-op should be as invested in the people and process as much as the project.
ASSESS: IS A CO-OP THE RIGHT FIT?
- Know who you are working with: start with small collaborative projects and build relationships.
- Commit to working collectively. Ask yourself:
- Why are you choosing to work with each other?
- How much experience do you have working collectively?
- Do you share the same values and vision?
- Do you share a commitment to democratic principles?
- If the social and democratic element of your team is ready to work together:
- Do you have the skills and interest in doing the work to set up a co-op?
- What skills and resources does the group already have?
- What skills are needed, and how will those skills be developed or brought in through a third-party?
- Know from the outset how the co-op would manage disbanding if the members decided to go their separate ways.
It is highly advisable to work with a professional co-op developer to support the complex process of establishing a co-op. BC Cooperatives Association, Co-op Creator, Vancity, Cooperatives First, and other co-operative organizations have resources to support you in getting up and running.
CO-OPERATIVES AS A TRANSITION MODEL
As a transition model, co-operatives can allow for the purchase of land and farm businesses despite high land costs, reflect the community-oriented values of the current farmer(s), and provide a structure for continued succession in the future. Transitioning an existing farm business into a co-operative could mean that the co-op owns the farm business, the land, or both.
A farm co-op can have long-term secure land access through purchasing land via financing from members or community fundraising. However, it is also possible for a co-op to farm the land without owning the land. In cases where the land will be held by an entity other than the farmer, such as the current farmer’s heirs, a community organization or a trust, a co-op can manage and farm the land through a long-term lease.
Co-operatives have a clearly outlined structure for when individuals want to join or leave. Co-operative farms such as Fraser Common Farm have been able to onboard new farmers as the elder generation steps back from the farm business, and the co-operative structure allows for all parties to meet their needs and contribute to the farm according to skills and capacity.
There are two main mechanisms for using a co-operative in your transition plan:
1. CURRENT FARMER TURNS THE FARM INTO A CO-OP
A current farmer can transition a farm business (sole proprietorship/corporation) into a co-operative by inviting others to join as members. This model provides the current farmer the opportunity to recruit entering farmers and cultivate relationships to ensure the farm continues into the future. In this scenario, the current farmer will be more involved with mentoring, and the transition will likely unfold over many years of cultivating relationships.
ASSESS: IS IT THE RIGHT FIT?
- Entering farmers may not immediately have the resources to buy the land or business.
- Current farmers want to continue to be involved for the foreseeable future, and have the time and energy.
- Current farmers don’t have any immediate financial needs and want to continue living and working on the farm.
- Current farmers are prepared to do the work of recruiting and cultivating co-op members, with the knowledge that it could take time, potentially years to develop.
- Current farmers are eager to work collaboratively with entering farmers to plan for the future and build the co-op.
- All parties are aligned with co-operative values.
2. ENTERING FARMERS FORM A NEW CO-OP
A new co-op group can form with the goal of buying a farm together from a current farmer. Buying land cooperatively may allow entering farmers to access land that would otherwise be out of the price range of an individual. In this scenario, the current farmer may or may not provide ongoing mentorship to the entering farmers.
ASSESS: IS IT THE RIGHT FIT?
- Employees/interested parties can pool resources to purchase the land and business.
- The entering farmers want to own the land.
- The current farmers need the financial benefit of a sale to fund their retirement plans and provide for their heirs.
- The current farmers want an “exit strategy” that doesn’t require them to stay on the farm or be involved for years to come.
- All parties are aligned with co-operative values.
CONSIDERATIONS FOR OBTAINING FINANCING AS A CO-OPERATIVE:
- To purchase land, the co-op needs to make a down payment pooled from the members.
- The co-op needs to demonstrate the ability to make loan/mortgage payments, and should have a realistic business plan with cash flow projections.
- Financial institutions usually require three years of financial history for a business to qualify for a mortgage; this is equally true for co-ops. A lender will usually seek personal guarantees from each member. These guarantees would be reviewed whenever someone left or joined the co-op to requalify, and there is no guarantee of requalification.
- Once the co-operative has been running for three or more years and is operating successfully, it is possible to remove the personal guarantees and transfer the liability to the co-operative itself.
- It’s important to find a lender that understands co-operatives, and won’t impose added barriers to accessing resources. In general, credit unions, also known as financial services co-operatives, are a good place to start.
- Vancity has co-op specific lending available, such as a loan for those needing to finance their membership share in a worker’s co-op and microfinancing for start-up co-ops.
- Other financing sources include Futurpreneur, Canadian Co-operative Investment Fund, and worker co-ops, e.g. the Canadian Worker Co-op Federations’ Tenacity Works Fund.
- Lenders will be looking closely at:
- The co-op’s Memorandum of Association and Rules of Association; particular attention will be paid to the purposes of the co-operative, the membership share and the financial commitment members are making to their co-operative, and opportunities for members to participate in the governance of the enterprise;
- The experience of the members, including whether they are farm school graduates and/or have farming experience, and any skill gaps and plans to fill these; and,
- A business plan to help assess the farm’s capacity for financial viability.