Capital Structures
Almost every co-operative or joint venture business requires capital to start up, or for continuing development. Its vital to plan how the capital required by the business will be secured, to ensure that the most appropriate legal structure is adopted, and so that members are fully informed of the financial commitment expected of them, and the terms under which capital is provided to their co-op. We provide specialist advice.
New Business Start
Traditionally, farmers and growers capitalise new co-ops from the following sources;
- Member equity 33%
- Bank borrowing 33%
- Grants 33%
The proportions vary according to the availability of grant and the banks' evaluation of the business risk. Member equity might take the form of shares (redeemable or non-redeemable) or loans that are often linked to commitment of produce to the co-op, or, in new generation co-ops, to delivery rights. Consideration of future capital needs, and of members' expectations of capital redemption, is essential. The right solution must also take into account whether the co-op will have few members, and a large capital commitment from each, or many members, and a small capital commitment from each. Seek our advice.
Established Businesses
Funding growth can be very challenging, because it requires additional capital, and unlike plcs, co-ops cannot sell equity shares to institutional investors and the public. Traditionally, co-ops funded growth out of profits, and held large mutual profit reserves (common funds) on which they did not pay interest and members could not redeem. This incentivised members to favour profit distribution, rather than profit retention to provide capital for growth. But now, few farmers are prepared to commit large amounts of capital to their co-op unless it can be redeemed at some future time, either from the co-op, or by selling their 'share' and rights in the co-op.
There are several alternative solutions. We have expert knowledge and provide specialist advice.