CO-OPERATIVE ACQUISITION STRATEGY
Co-operative Acquisition Strategy
The number of “baby boomer” business owners wanting to retire and realise their assets by disposing of their businesses and selling properties is increasing. This could potentially put large numbers of people out of work.
Advice on how to transfer ownership to staff in the way of a workers co-operative through experience is not readily available or easily found in Australia. Also, existing employee cooperatives can become successful through mergers and acquisitions
Having recently transferred our 50-year-old family manufacturing business www.cmac.com.au to a workers’ co-operative so I could exit the business and retire, I discovered that co-operatives can potentially be the most socially responsible solution.
This was after a journey of nine (9) years exploring and trying different succession options.
All the below succession options were implemented and tried at C-Mac and the co-operative solution was the only one that got over the line in this economic environment where manufacturing has been struggling and re-inventing itself in Australia:
- Employee Share Ownership Plan – ESOP
- Purchase of business by employees
- Sell business on open market
- Management buyout
- Staff acquisition or take over via a worker co-operative (this succeeded at C-Mac)
- Retain ownership but employ a short-term or long-term external manager (discussed and not considered an option)
- Liquidate or wind up the business (discussed only)
Baby boomers now in 2020 average age is over 70, they own many small businesses in Western Sydney wanting to exit their businesses and realise their assets for retirement are faced with many issues.
- Baby boomers are realising their retirement asset is their property, not their business. To retire they need to realise their property asset or receive a rental income.
- Few investors want to buy manufacturing businesses, which generally have small or poor profitability, even though the business may have provided a good living to the baby boomer’s family and staff. It becomes extremely difficult to sell the business and obtain any monetary value.
- Closure of a business may be costly due to long service leave and redundancy entitlements because of staff loyalty and long term employment. This can mean existing owners, even after selling equipment assets, may have to raise funds to close. (Auction sales generally realise 1/10th asset value)
- Management staff generally have insufficient funds to instigate a management buyout.
- ESOPs (Employee Share Ownership Plans) take time to implement. ESOP legislation is very complex and simple schemes are difficult and expensive to set up. Transfer of share ownership takes time and requires companies to be very profitable and the cultural change to ownership is slow.
- Small business owners generally want to look after their staff.
- Transfer of ownership to staff is possible by setting up an employee-owned co-operative, but this is not a common practice in Australia as it is in the UK, Europe and USA. Australia has many hurdles and disincentives.
Concern for Western Sydney workers and families:
With technology advancing with “Industry 4.0” and “IoT” (Internet of Things), it is predicted that 45% of existing jobs won’t exist in the next 10 years.
If workers can stay engaged in running their own businesses, they are likely to reinvent their jobs and provide for their families and their future. However, if small businesses are closed and staff made redundant their chances of finding new jobs are low.
Their job skills will no longer be required for employment in the future, and they will have to be re-trained to find a job. This puts an even greater burden on our economy.
The divide between business and household wealth is an issue currently being discussed in the media. I believe co-ops are a solution.
Why are there not more staff buyouts?
We have discovered with C-Mac that:
- workers are risk-averse,
- workers lack access to financial planning and legal advice,
- workers lack access to funds,
- Economists and professionals believe staff co-ops will fail.
- The accountant does not understand worker co-operatives
- The owner does not see the staff having the skills
- Management Buyouts Outs (MBO’s) get first priority
- The owner does not think of selling to the staff.
- Management has a first preference and is in the driver’s seat with limited access to capital and skills.
- Management has security to offer.
How do you unlock the value you have in your company?
- Depends on your values as to what unlocks!
- Dollar value
- Removal of all your liabilities and personal guarantees
- Guaranteed future rental income and a potential purchaser of your property
- Seeing your life work continue and grow
- Wanting to reduce your working hrs and become a member and/or a director of the co-op and still contribute.
- Whether you want to leave a legacy
- Concern and appreciation for your employees loyalty and well-being
- Needs to be a win/win for retiring owners and all employees
Some more facts about co-operatives
- “Medium household net wealth is 92% higher for employee-owners than for non-employee owners”. National Centre for Employee Ownership report: https://www.ownershipeconomy.org/
- Management buyouts MBO’s have a higher failure rate than co-operatives which have an 80% success rate. Canadian data.
- To sell a Pty Ltd company and create a workers co-operative there are two options:
- User legislation exists to convert a Pty Ltd to a Co-operative – downside is that it brings all the liabilities across.
- Setup a new co-op – a fresh start with nothing suddenly coming out of the old cupboard to surprise you.
C-Mac Industries has provided a “Proof of concept” and an ability to scale up to make a significant difference to business in Australia.
Social Impact and Social Responsibilities need to be something to be considered by all business owners when they consider succession planning
C-Mac’s Industries Co-operative – Merger & Acquisition Guidelines:
We are there to assist – “Join us”
There is very significant potential for existing cooperatives to become successful through mergers and acquisitions in the manufacturing sector where there are companies with owners wanting to retire or exit.
There is also a danger that a single employee-owned cooperative may not be able to survive as an SME of around 30 staff for more than 7-10 years if it remains the same size and is the only cooperative.
Care must be taken by the existing Cooperative to ensure that the cost and risks of an acquisition are well canvassed and existing co-operative members are well informed and have given approval for the acquisition at a General Assembly meeting.
The driving philosophy is that businesses that are owned by those who work in them are more efficient, more effective; use fewer resources; are more motivated to produce excellent products and services; will build a better life for themselves and their families and be better members of society and communities.
The key is the empowerment of individuals through education which strengthens communities, building a better society and world for our children and their grandchildren.
If you want to get an understanding of Australian culture and employee ownership in the workplace; the book “Swapping Desks – Pioneering Business Succession via employee ownership” explains a family business succession to the employees and the struggles he faced
Acquisition Strategy for an existing Cooperative
C-Mac has in the past grown through a number of acquisitions which have been financially well managed and prudent:
- Westacott Engineering
- Parramatta Tank Works, (corrugated water tanks)
- Lynfast Engineering (gear cutting),
- Andersen Engineering (Comet Potting Machine)
- Accord (Industrial acoustics)
The process and criteria to evaluate the potential and viability of an acquisition may take years as did C-Mac’s succession, or it can be months and or in the case of a distressed business may be very short.
Four (4) different methods for an acquisition or merger:
- Acquire and absorb small niche product businesses
- Absorb common overheads, common rental and share skill and the labour force. There will be cultural change issues to be addressed.
- Acquire another firm, allow it to self-manage itself but C-Mac Co-operative provides a centralized administration
- Have a general manager and its own administration that reported to the board of the C Mac Co-operative Ltd.
- Assist another standalone firm transition to staff ownership. Provide consultancy, mentoring and coaching
Our Vision for Co-operatives
A network or cluster of co-operatives across the Greater Western Sydney Region with a large manufacturing base.
Process for existing cooperatives to become successful through mergers and acquisitions
- Process the enquiry.
- The enquiry may come through the C-Mac website; existing customer or a member gets a lead. All leads are passed onto the General Manager for action.
- Meeting with the existing owner
- Inspection of business
- Discuss what values the owner would like to get out of his succession.
- Complete questionnaire
- P&L and Balance Sheet discussions
- Meeting with staff representatives
- Decide which of the above models would be appropriate for their business.
- Discuss the process from the staff’s viewpoint
- Explain to staff the WIN-WIN scenario
- C-Mac co-op member speaks to staff
- Evaluation of the potential for model agreed upon
- Conduct an Economic and Social Audit and supply a short report.
- If a decision to proceed (depending on which model) is made a contract with the CDA team to deliver 12 months of mediation and coaching through the succession process is signed.
- Implementation of the plan (example)
- Achieving buy-in of the staff team
- Negotiating for a win/win scenario between owner and employees
- New co-op business structure, General assembly Board, Management, Staff Committee, Toolbox talks
- Raising the finance
- Structuring the buyout legalities: Selling and purchaser obligations
- Formation Documents and co-op registration
- The signing of Sale contract and leases
- Ongoing co-operative support
How do you (existing owner) unlock the value in your business so you can retire?
It depends on your values as to what unlocks!
Below is how the original owners of C-Mac unlocked the value of C-Mac:
- Removal of all worries, responsibilities
- Removal of all personal liabilities and guarantees
- Guaranteed future rental income and a potential purchaser of the property
- Seeing your life work continue and grow
- Gives flexibility of lifestyle, gradually retire with reduced working hrs and responsibilities
- Gives time to transfer your ability and skills
- Still, be able to contribute as a member and a director of the C-Mac co-op.
- Leave a legacy
- Fulfil your responsibilities to loyal staff and provide for their future
- Not have to pay out redundancies
NEEDS TO BE A WIN/WIN FOR RETIRING OWNERS AND ALL EMPLOYEES
The Cooperative Development Network Team
The team guiding you and your employees are experts in their field and consist of:
Dr Anthony Jensen: a world authority on Co-operative who is respected for his knowledge on the process of establishing and maintaining viable co-operatives.
Frank Webb CPA: an accountant and successful business coach who has the understanding of business and an ability to explain simply the role of business accounts in the process of putting the succession together with a win/win approach.
Would you like to learn how an employee-owned cooperative can transform the business into a “High Performing Manufacturing Workers Co-operative”?