Should Your Small Business Be a Co-Op?
As the economic rebound continues to lag, many entrepreneurs and small companies are looking for innovative strategies to survive and prosper in the face of tough times and even tougher credit. Perhaps the most innovative approach is to rethink the very nature of what it means to be a company.
That's the approach Full Sail Brewing Company, a small craft brewer outside Portland, Oregon, took. In the late 1990s, 10 years after its founding, Full Sail faced a crisis. Some of its original investors wanted to take their money out and were pressing the company's founders to sell the brand to a larger beer maker. But the founders didn't want to sell, so they came up with a creative solution: They would turn the brewery into an employee-owned company -- a co-op -- and raise the money to buy out the original investors when transferring the shares to the employees.
It worked: Full Sail has continued to expand, more than doubling in size in a decade, and has used its co-op structure to motivate its 100 workers and keep quality high.
Co-ops have long been dismissed as touchy-feely experiments in business socialism, but with growing pressure on many traditional companies, the co-op model is getting increased attention -- not just as a political statement of owner-worker solidarity, but as a fresh approach to business success.
"The co-op has a social good, but it has to be profitable to survive," says Irene Firmat, founder and CEO of Full Sail. "If you can get both of those goals, you can have a company that can sell itself to consumers as unique [and] local, and also can make money."
Generally, co-ops are defined as having employees who share in the profits and losses of the company, and who may also help choose the management -- in essence, an employee-owned company. According to the National Cooperative Business Association trade group, cooperatives account for nearly $654 billion in revenue and more than 2 million jobs nationwide -- up from less than half that a decade ago and virtually nothing 20 years ago. Those figures are expected to grow substantially in 2011, due in part to the weak economy.
When companies need money and can't get funding in the usual ways, they tend to be more open to the co-op structure because it can open the door to new types of funding streams, notes Kimberly Zeuli, a former professor at the University of Wisconsin who authored several studies of business cooperatives. In many cities, foundations are looking for funding opportunities to help promote local development. Most of these foundations don't fund regular startups, but they see the wider ownership of co-ops as a better investment in the community, and are often more amenable to funding them.
Co-Ops Rising
Several new high-profile cooperatives have attracted a substantial amount of funding from local foundations and investors. In Cleveland, entrepreneurs backed by a grant from a local development fund opened Evergreen Cooperative Laundry, a worker-owned firm that delivers high-end laundry services to health care providers and currently employs 10 workers. Its success inspired a similar co-op, Ohio Cooperative Solar, which will provide solar panels for large companies. In New York, another new co-op, ReBuilders Source, will sell recycled building materials to construction companies.
Co-ops offer several advantages, the primary one being that because employees own the business and share in its success, motivation is seldom a problem. "You have at least two-thirds of the workers who take great pride in the fact that we are an employee-owned company, that their name is on the line in terms of quality," explains Firmat. And because co-ops usually keep overhead low -- the workers who own them naturally want to keep expenses down -- they can often pass on lower prices to consumers. And, notes Firmat, Full Sail is able to use its employee ownership as a marketing tool to help foster an image of high quality and local production, which appeals to many beer buyers.
Co-ops' low costs can give them a real advantage in the most expensive sectors of the economy. That's good business, but also good for customers. "Health care and employee-benefits cooperatives can help rein in the skyrocketing costs of these services," notes NCBA president Paul Hazen.
Nothing's Perfect
Still, co-ops are not without their downsides. First, you can't ignore the fact that co-ops are inherently group ventures. That means the wealth created is spread around, often leaving less for the founders and investors. It takes a certain type of entrepreneur to embrace that model, as well as open-minded investors interested in unconventional funding opportunities.
Second, converting an existing business into a co-op can be expensive if you need to transfer ownership from the founders and investors to the employees. Borrowing money to do that can place a lasting financial burden on a co-op. "You need money to buy out your original financiers and to turn it into employee-owned, and taking on this debt isn't getting you some new physical plant or technology -- the money is essentially going to your workers," explains Firmat, who notes that the legacy costs of these workers' shares can also add up over time. "Taking on that financial burden, without getting some kind of machinery, can be a hurdle for some people, but you can get the money back in how much better quality work everyone does."
What's more, in a co-op, an entrepreneur may have to draw up more complex plans for employee ownership, voting rights, and decision-making processes. And because co-ops have multiple owners, decision-making authority may be more dispersed, meaning it may take longer to reach decisions -- especially on important and controversial issues. This is particularly true as a co-op grows.
Size Matters
While there are a few large, well-established co-ops, such as the Land O'Lakes Inc. dairy co-op owned by some 7,000 farmer-members, most new co-ops are small, with fewer than 10 employees.
That's because the co-op strategy can become unwieldy as organizations grow beyond 100 or so employees. "You do have to make sure that, even though it's going to be a co-op, everyone in the company understands they can't be questioning everyone else's decisions all of the time," says Firmat. "We don't have brewers telling salespeople what to do and salespeople telling brewers what to do. You still have to get into the company culture that everyone has different responsibilities, and that can be hard to do."
Many of these problems refer particularly to converting an existing business into a co-op. Starting a new venture as a co-op avoids those issues and can cut startup costs significantly as workers may accept ownership stakes in lieu of additional salary.
Clearly, a co-op structure isn't right for every business, or every entrepreneur. But as the turbulent economy puts ever more pressure on traditional small businesses, the ability of co-ops to spread the risks and rewards makes them an increasingly preferred alternative.
For more information on how to start and fund a new co-op, find foundations and other grant-makers that support co-ops, and find jobs at cooperatives, check out these online resources:
USWorker.coop
