Factors Involved in Successfully
Starting a New Generation Cooperative
Regardless of its unique features,
a new generation cooperative is a business that must compete in the same
marketing environment with other businesses. Although there is no
automatic formula for ensuring that an NGC will be successful, some important
observations have been gathered from previous experiences:
The primary reason for starting up an NGC
must be a compelling economic need rather than a rural development objective.
If an NGC is started mainly to create jobs and tax dollars in a local economy,
it likely won’t last very long. Although these sorts of things can
be positive spin-offs from a successful cooperative, they cannot be the
driving force behind the NGC’s formation. This can be a particularly
sensitive area when the NGC’s organizers are choosing a location for the
cooperative’s facility. The fundamental reason for starting a business
is because there is an economic need to be fulfilled in the marketplace.
The key questions to ask are: Is there a customer market for the
finished product? Can the NGC meet customer needs and earn a profit?
Leadership for the NGC needs to come from
within the producer group rather than from outsiders such as government
consultants. As one prominent advisor to NGCs put it, “People in
suits don’t sell farmers, farmers sell farmers.” Leaders (or “project
champions,” as they are sometimes called) are agricultural producers who
will be members of the NGC. Although outside advisors such as cooperative
development specialists will be needed during the formative stages, these
individuals are there to contribute to rather than control the project.
Leaders need to understand the economic objective of the NGC. They
should have a realistic vision of what the NGC is to accomplish.
Leaders need to have the time and energy available to devote to the project.
Do not underestimate the time required to guide a cooperative through its
formative stages. One expert has noted, “it’s almost astounding how
much human capital it requires to bring something from the idea stage to
operational stage.” Leaders are part of a steering committee, whose
members are responsible for guiding the cooperative though its development
stages. Steering committee members are responsible for coordinating
a feasibility study.
Preliminary research is required to determine
if the idea is economically viable and to gauge the potential level of
support from producers. A feasibility study should be undertaken to determine
if the project has the potential to succeed. As well, a producer
survey and seed money drive help to measure the level of support for the
project among producers and raise money for early development activities.
If the results of the feasibility study are
positive, a comprehensive business plan should be prepared as a formal
guideline for the NGC. A business plan serves as a blueprint that
helps interested investors and lenders determine the potential success
of the NGC. The importance of a business plan should not be underestimated.
One of the main reasons why businesses fail is a lack of adequate planning.
The business plan should indicate that the NGC has hired, or will be hiring,
a capable management team to run the organization. The members on
a NGC’s board of directors are most often agricultural producers who may
not have the managerial expertise nor the time required to run a specialized
processing and distribution company. A competent and experienced
management team is needed to oversee the day-to-day operations of the NGC.
A sufficient level of member equity must be
committed to the NGC. Member equity is raised through the issuance
of membership shares and special investment shares, the latter of which
may create delivery rights or obligations. Before they agree to provide
debt financing, U.S. financial institutions have often wanted to see 40
to 50 percent of the cooperative’s capital needs funded by member equity.
The level required by Canadian financial institutions remains to be seen;
NGCs will most likely be evaluated on a case-by-case basis. The NGC’s
organizers need to plan and conduct a successful equity drive to meet its
member equity financing needs. If the targeted member equity level
is not met, then the NGC will be unable to begin operations.
The NGC’s organizers need to ensure that all
legislative requirements have been met. For instance, the NGC needs
to be aware of applicable legislation when the time comes to incorporate
the business and issue shares. Lawyers and accountants should be
consulted to ensure that the articles and bylaws of the cooperative are
properly drawn and that they meet the stipulated legislative requirements.
In addition to the above, a set
of critical success factors regarding
new cooperatives has been noted.
The following sections of this manual describe
in more detail some of the preceding items. Their objective is to
outline some of the issues to consider when forming a new generation cooperative.
Next
Home
Sources:
Bostrom, Brent D. 1994. Potential pitfalls
for new cooperatives. Year in Cooperation Vol. 1 No. 1: pp. 14-15.
Minnesota Association of Cooperatives.
Campbell, Dan (ed.). 1995. Look in the
mirror ignited rural development. Farmer Cooperatives August Vol.
62 No. 5. Published by the U.S. Department of Agriculture.
Hanson, Mark. 1998. Farming options a hot
topic. Bismarck Tribune article dated Thursday, February 5th.
Online. Retrieved July 8, 1999. www.ndonline.com/TribWebPage/feb1998/259871930.html
.
Johnson, Dennis A. 1995. The rise of New-Wave
cooperatives. Year in Cooperation Vol. 2 No. 1: pp. 8-9. Minnesota
Association of Cooperatives.