This section gives an overview of the key features of a community buyout:
- A willing and patient seller
- Development risk
- The difficulty of agreeing a fair valuation for the business
Communities engaged in acquisitions and buy-outs face all the same challenges as pre-start initiatives, but often with the extra features of:
- Having to act quickly, especially if there is competition to buy the business or its principal assets
- Having to commit to development costs with the risk of substantial losses as there is no certainty that it will be successful in acquiring the business,
- The difficulty of agreeing a fair valuation for the business, especially when the principal assets are worth more as non-business assets.
There are however a number of ways for communities to overcome these additional challenges:
Feature 1: A willing and patient seller
The issue: Clearly, a community buyout will not succeed if the existing owners of the business are not willing to sell the business. However, even if they are willing to sell, often the timetable for the community to be in a position to take on the business is extremely limited.
The Localism Act and Assets of Community Value (ACV)
This challenge can now be moderated by using the powers included in the Localism Act to list Assets of Community Value (ACV). This gives communities six months in which to prepare a bid to purchase a listed asset if it is put up for sale.
A building or other land is an asset of community value if its main use has recently been or is presently used to further the social wellbeing or social interests of the local community and could do so in the future.
The Localism Act states that “social interests” include cultural, recreational and sporting interests. The regulations list a number of situations where land or buildings are exempt from inclusion on the list or operation of the moratorium. These include homes, hotels, assets being transferred between similar businesses, and Church of England land holdings.
Who can nominate Assets of Community Value?
A number of a community organisation can nominate land and buildings for inclusion on the list: parish councils, neighbourhood forums (as defined in Neighbourhood Planning regulations), unconstituted community groups of at least 21 members, not-for-private-profit organisations (e.g. charities).
Community organisations also have to have a local connection, which means their activities are wholly or partly concerned with the area, or with a neighbouring authority’s area.
Decisions and appeals
If a community organisation nominates land or buildings that meet the definition of an Asset of Community Value, and the nomination process was undertaken correctly (i.e. came from a group entitled to nominate), then the Local Authority must include the asset on its list. Assets will remain on the list for at least 5 years.
If the council decides that the nomination doesn’t meet the criteria, then they must write to the group who nominated the asset and provide an explanation. They must also keep a list of unsuccessful nominations for at least 5 years. Landowners can ask local authorities to review the inclusion of an asset on the list, and this triggers an appeal to an independent body, called a First Tier Tribunal.
The act does not give first refusal to community organisations to buy an asset that they successfully nominate for inclusion on the local authority’s list. What it does do is give time for them to put together the funding necessary to bid to buy the asset on the open market. If an owner wants to sell property/land that is on the list, they must tell the local authority.
If the nominating body is keen to develop a bid, they can then call for the local authority to trigger a moratorium period, during which time the owner cannot proceed to sell the asset. There are two moratorium periods - both start from the date the owner of the asset tells the local authority of their intention to sell. The first is the interim moratorium period, which is 6 weeks, during which time a community organisation can decide if they want to be considered as a potential bidder. The other is a full moratorium period, which is six months, during which a community organisation can develop a proposal and raise the money required to bid to buy the asset.
Feature 2: Development risk
The issue: One of the other challenges with a community buyout is having to commit to development costs with no certainty that it will be successful in acquiring the business, with the risk of substantial losses.
Developing pre-start initiatives can be expensive, time-consuming and highly risky. Pre-start development costs may include professional fees for legal advice, financial advice, planning permission, asset valuations, market appraisals, feasibility studies and business plans. The society will be unable to recoup its money if its plans turn out to be unfeasible, or if the society subsequently fails to attract the investment capital it needs to implement its business plan. When a group is planning to acquire an existing business or property, there is the risk that the society will lose a competitive bid, and will be unable to proceed, even though the proposition is viable and the society has raised the necessary capital.
The best way of financing these development costs is through grants, gifts, donations and other voluntary fundraising methods, although there is usually a limit to how much money can be raised this way. By setting up a co-operative, the enterprise has access to members who may be prepared to provide more development finance if there is a possibility, however remote, that they could get their money back.
The principal way to access development finance from members is through community shares, specifically via a Pioneer share offer:
Pioneer share offers
The purpose of a pioneer offer is to raise share capital for a society that will be spent on getting the enterprise investment-ready. Investing in an enterprise that is not investment-ready is a high-risk activity and, because of this, pioneer offers should only be made to existing members or known supporters who have already expressed an interest in investing in the society. Pioneer offers should not be promoted to the general public.
A pioneer offer invites members and known supporters to invest share capital, which will be spent by the society to get investment-ready. If the society is unsuccessful, pioneer investors will lose all that they invest. However, if the society’s plans succeed, and it becomes a profitable trading enterprise, then pioneer investors may be able to withdraw their capital in accordance with the terms of the pioneer offer, and subject to any renegotiated terms set out in subsequent offer documents.
Before making a pioneer offer, the venture needs to prepare a development plan that identifies all the costs that will be incurred in becoming investment-ready. Development costs should be kept in scale with estimates of the start-up costs of the venture, and should not normally be more than 5% to 10% of these start-up costs.
Feature 3: The difficulty of agreeing a fair valuation for the business
The issue: One of the main issues of agreeing a fair valuation is that it is not unusual with community buyouts for the owner(s) of the business to be a member or even an activist and founder of the society leading the buy-out.
If the owner is selling the business to the community, it is important to obtain an independent valuation of the business or put other arrangements in place to avoid the possibility that personal interests are in conflict with community benefits.
Business valuations are notoriously difficult; accountants and other relevant professionals are usually reluctant to commit themselves to a precise valuation because they know that, ultimately, the value of a business is whatever somebody is prepared to pay for it. Updated: 26/03/2019