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Would a community buyout always be appropriate?
A community buyout will not be appropriate in every situation for a variety of reasons. The key to any successful community buyout is proper planning in the initial stages to ensure that your organisation and situation is compatible with a community buyout. Part of this planning has to be an assessment of how your current position satisfies the critical success factors for a community buyout.
There are five major critical success factors:
- a willing seller
- a willing buyer
- a team capable of leading the business when the owner exits
- a financially viable proposition
- a physical asset
A willing seller
Clearly, a community buyout will not succeed if the existing owners of the business are not willing to sell the business, or will only sell the business for what might appear an excessive price.
There are many situations where the owner, or owners, of a business may want to sell the business or a percentage of it:
- Retirement – Where a business is privately owned, the sole or principal shareholder may be nearing retirement and may want to sell their investment in the business. Private owners are normally concerned about whom they sell their business to, as they want to maintain the independence of the business and ensure it doesn’t deteriorate and jeopardise community jobs, also they may not like the prospect of selling to a competitor with whom they’ve competed for a number of years. The sale of the business to community maintains its independence and keeps the business in the community.
- Realisation of investment - The current owners of a business may require their funds, or may not want to continue with their investment in the business, or due to personal circumstances might need to realise their value at short notice.
- Business in distress - A poorly performing business may be threatened with closure by its current owners to prevent further losses. In order to save their jobs, the community could buy the business from the current owners. There needs to be a clear view taken as to why the business is failing. It may be there are factors which are beyond the community’s control. On the other hand, the business may simply not have been serving the needs of the community properly and providing what the community actually wants brings back custom.
- Privatisation – In the current economic climate it is common for government to seek to sell public sector enterprises to the private sector, to reduce the burden on the public sector. An alternative option to a trade sale or a float is a sell off to the community served by the business.
A willing buyer
Every community buyout requires a willing seller and willing buyer. Is there really a need for the business in the community or is the business no longer valued by most of the community? Will the community patronise the business – people may say they like the idea of a village shop, but if they are not prepared to shop there then there is no business.
Where community investment is required there are a number of reasons which will determine whether the community will want to buy the business:
- Whether the community are willing to be involved and to work to save the business? Is this the hobby horse of one or two people or a genuinely valued community asset?
- Is there a collective belief that the business is viable and can continue to be so? Does the community continue to need the product/service? Are there unmet needs in the community for expansion/diversification?
- Is there trust in the people who will lead the business post buyout? Do they have the ability to make the strategic and operational decisions required? Do they have credibility in the community?
These are critical questions that the community will want to answer prior to making any decision about investing their money.
Board of Directors / Management team capable of leading the business when the owner exits
Ultimately the group will need to convince the community and/or financing institutions that have the capability to manage the business in an independent environment, and to provide sufficient returns on the finance provided by the community or institutions.
There is no guarantee that a Board or management team drawn from the community will have ability or desire to cope successfully with the strains of management and ownership following a buy-out. Therefore it is essential to look at the skills mix within the steering group to make sure there is a correct mix of skills. There needs to be some real understanding of the local community but this must be combined with some hard business skills or experience.
A community buyout changes the dynamic between management and the community in that the community will be the owners of the business and the managers and community are in effect working for their combined interests. A clear management structure needs to be in place; Fred cannot come into the shop and tell the staff member behind the till that he wants a particular item stocked because he is one of the owners of the business.
Ideally, a Board of Directors and/or management team in a co-owned business will be one which:
- is value driven and clear about the direction the business should be taking;
- is strong in key business areas;
- has a detailed knowledge of the community and credibility within the community;
- is keen to share information, encourage ideas, rewards and recognises good work;
- works together for the collective good;
- understands that with responsibility comes accountability.
A financially viable proposition
There are two key factors that must be present for a community buyout to be a success:
- Reasonable purchase price
- Strong cash flows
A community buyout won’t proceed if the purchase price is excessive and not possible to fund. An excessive purchase price will require either an upfront cash outlay from community, financing from institutions, or a mix of these. Subsequent interest payments could place too much pressure on cash flows, with the result that the business will fail. The business must have the ability to generate cash flows sufficient to enable the repayment of debt, and provide a satisfactory return on equity. The need to reduce the initial high level of borrowings inherent in buyouts means that the generation of a strong cash flow is of paramount importance.
On the other hand, the main interest of the community is in maintaining the business, not making a return on investment. Most community share offers at the moment are offering a return between 3-5%. Such a return would not be satisfactory to a private investor.
The cash flow should be reasonably predictable and not immediately absorbed into providing working capital finance (i.e. finance for day to day activities) due to the cyclical nature of the business or an uncontrolled rate of expansion.
It is often assumed that the business must be bought on day one, but it may be possible to structure the purchase price over time lessening the need for upfront payments.
A physical asset
Experience shows that communities understand best the purchase of an asset – a turbine, a building, a piece of land. Most members of the community are not used to buying businesses – they can grasp the idea of being part owners of, say, the local pub, but they cannot grasp being part owners of a service. The vast majority of successful community buyouts have been focused on purchasing an asset.