Small Town, New Building

Viroqua is an agricultural community with a population of 4,300, set in the unique landscape of southwestern Wisconsin. The glaciers that carved out the Great Lakes missed this region, leaving winding rivers, stony bluffs, high ridges, and steep valleys. For the last few decades, Viroqua has attracted those who long for a better lifestyle. Health care options, school choices, and good food are some of the top priorities; and our informed community is a part of our success. But how can a small town food co-op fund a relocation project, build a brand new store, and own it? We had to get creative and meet our financing needs while bringing everyone on board.

In 2001, the Viroqua Food Co-op began plans to relocate from its current location. We had outgrown our tiny 920 square feet of retail space tucked behind the local hardware store. Back then, we never imagined it would take four years for the relocation project to near completion. However, the end is in sight. We are on schedule to open a brand-new 7,200-square-foot building this summer, located on Main Street.
From the beginning, we invested a lot of time and effort into planning for our new building. At every step, we solicited valuable input from our membership to ensure that we were building a cooperative business that reflected their needs and fulfilled our mission.

The board of directors realized early one of our main responsibilities is to ensure that the necessary financing is in place to make our dream a reality. Several Midwestern co-ops helped us understand exactly what it takes to run a successful capital campaign. Thank you Outpost Natural Foods in Milwaukee, People’s Food Co-op in La Crosse, and Bluff Country Co-op in Winona for sharing time and information.

Balance sheet and cash flow advantages

Like many co-ops, we initially designed and launched a member loan program. However, I work for Organic Valley/CROPP Cooperative, and I had recently spearheaded a project there to create an investment vehicle that allowed for investment by both members and nonmembers alike. I felt this strategy might also work for the Viroqua Food Co-op, so I proposed it to the general manager and board of directors.

What Organic Valley had done, and what the Viroqua Food Co-op decided to do, was create a class of preferred stock that is used as an investment vehicle by the co-op. When people hear the word “stock” they usually think of the common stock of publicly held companies. Preferred stock, however, is very different from common stock. It is more like a bond in how it operates and has a per share value that does not fluctuate in value—in our case, $25 per share. Preferred stock also normally has a fixed dividend rate—in our case, a 5.5 percent annual rate of return. We discussed the return rate at length before settling on this figure. We felt this was a rate of return that balanced our need to attract investors with our desire to limit the co-op’s financial obligations.

Compared to a traditional loan program, preferred stock offers two advantages that led our board to this decision. First, preferred stock is considered equity on a balance sheet whereas loans are considered liabilities. Like many small, young co-ops, we didn’t ”own” much, and our newly formed membership equity was still building on our balance sheet. Having preferred stock investments as equity on our balance sheet was a big plus when we sat down to talk with bankers about financing our project.

There is a note of caution here: the Financial Accounting Standards Board is currently assessing cooperatives’ use of preferred stock, and they may reclassify it as a liability. Secondly, member loans typically have a set maturity date. Loans coming due can have a negative impact on cash flow for a co-op that finished a relocation or renovation project in the not-too-distant past. We were wrestling with our ability to retire those loans in the first couple of years after our new store opened. Preferred stock, however, is structured so that there is no finite maturity date. Preferred stock is redeemed at the request of the stockholder.

We put a further safeguard on our preferred stock. All redemptions are approved at the discretion of our board of directors. This means we can delay or deny requested redemptions if such payouts would adversely affect the cooperative’s financial position. Obviously, we had to create a plan for redeeming the preferred stock so our investors can get back their money; but the preferred stock offered a much greater degree of flexibility than a member loan program. Our members felt the same way. We have converted many member loans to stock at the request of the investors.

Educate, educate

As with most initiatives like these, it took a great deal of effort on our part to educate the membership about preferred stock and its advantages. There are two important reasons this education was absolutely necessary: we needed approval from our membership to amend our articles of incorporation to allow for preferred stock, and we anticipated our members would be the primary purchasers of the stock. As usual, our members had many good questions. Perhaps chief among these was the fear that preferred stockholders would be able to mount some sort of “hostile takeover” of the co-op. These concerns were alleviated when we explained that preferred stockholders had virtually no voting rights and would not be able to stage any kind of action within the co-op.

Although our members voted overwhelmingly to amend our articles of incorporation, there were still many components that needed our attention before we could offer the preferred stock. We referred to the Wisconsin cooperative statutes repeatedly since they spell out many of the rights and restrictions of preferred stock. It was also necessary to investigate securities laws in our state and in any other state where we wished to sell preferred stock—we have members, friends, and supporters from all over the country! Wisconsin has an exemption to securities registration available to co-ops that works for us so long as we keep our sales of preferred stock under $1 million. However, any time we consider selling stock to a resident of another state, we must be sure we are in compliance with that state’s securities laws.

Finally, it was our duty to make a disclosure of risk factors to potential investors. It is essential that investors understand the pros and cons of their investments. We were lucky to have an attorney on our board of directors as well as access to a securities attorney through my work at Organic Valley. Anyone considering instituting a preferred stock program should invest in legal advice throughout the process.

There are many factors to weigh when considering the best structure for a capital campaign for your co-op. The Viroqua Food Co-op is very pleased with the results of our decision to utilize preferred stock. The flexibility is working well for us and has enabled us to reach financial goals for our relocation project. At this point, we have raised approximately $325,000, mostly through preferred stock. The investment our members make in the co-op through preferred stock strengthens our business by building equity. Strong equity, in turn, permits other financial institutions to lend with confidence, helping cooperatives fund growth and to own their property. Preferred stock is the cornerstone for the beautiful new Viroqua Food Co-op.

*** Jerry McGeorge is a member of the board of director at Viroqua Food Co-op and is director of cooperative affairs at Organic Valley/CROPP Cooperative (mcbit@frontiernet.net).