Cooperatives and Due Diligence.

Due diligence is the research and analysis that a cooperative will perform in preparation for a business transaction. Due diligence is asking the tough questions. For example “Will this business support itself and cover all costs?” This is important for both start up and mature cooperatives. Due diligence means investigating and evaluating the opportunity or business activity in question and exercising care before entering into the transaction.

Due diligence basically means using common sense, doing your homework and thinking things through before investing time and money. By asking the right questions and getting answers the cooperative can make sure that no hidden time bombs are ticking away. If the cooperative is purchasing a business or property, there maybe certain things that the seller does not want you to discover. Can you learn their secrets before you buy? Due diligence is the process the cooperative goes through to discover everything before it buys. Once the deal is closed, it will be too late. There's little or nothing that can be done about it. The consequences can be enormous.

The key to good due diligence is in asking the right questions. Then preparing objective answers to the questions. The analysis is something like peeling away the layers of an onion. Continue to “peel the onion” by using follow-up questions – all with the goal of uncovering any unexpected results.

Be sure to frame the driving questions as open-ended and probing in nature.

Here are some examples of Board/Steering Committee due diligence questions for the start-up cooperative:

Will this business support itself and be able to pay all bills in a timely fashion?
Who will be our competition?
Who will be our customers?
How much money do we need to start-up the business?
What are the assumptions we are making and what happens if they change?

Once the questions are framed, the next step is to get the answers. Important is who will prepare the answers. The cooperative should seek out the highest quality information possible, prepared by someone objective to the process. The business or Steering Committee should guard against someone with a desired outcome from biasing the results.

The step in the due diligence process is to carefully review the answers to the driving questions, asking any follow ups that are relevant, if there is no additional information needed, make a decision on next steps.

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Each red dot on this Census of Agriculture map represents 20 farms that are no more, and each blue dot represents 20 new farms. In just five years, the US experienced a net loss of 90,000 farms. (Download as a PDF to magnify.)


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