Falling In Love (With CUSOs) So Easy To Do, But First...
There is a lot of interest in cooperative CUSOs these days. Credit unions are finding that it is more effective and economical to offer financial services and operational services on a cooperative basis through CUSOs. The types of services offered by these CUSOs vary widely and include services such as business lending, mortgage lending, information technology, insurance, human resources and trusts.
Until a few years ago there were only a handful of cooperative CUSOs, shared branching CUSOs being the most prominent. Since then, credit unions have been eager to find ways to work together to provide services more efficiently and effectively. I believe this changed attitude was the result of economic and competitive factors as well as seeing evidence of successful CUSOs. We can talk at great length on why credit unions should cooperate but that is the subject of another article. This is the first of two articles that focus on how credit unions should structure a cooperative CUSO to prevent organizational issues from interfering with the effectiveness of the CUSO enterprise.
The first stage of the cooperative relationship is not unlike dating. You wonder what it would be like to partner with particular credit unions. Would they have the same vision, passion and commitment that you do? Do they have the same needs? Do you trust them to do the right thing? Successful partnerships are driven by strong underlying economic and competitive forces to partner but they also require personal synergies. If the trust is not there, the partnership will never be successful.
My colleague in CUSO Advisors, Tom Davis, has conducted many visioning sessions with prospective CU partners. Credit unions gather at visioning sessions to discuss possible joint ventures and drill down to see if there is sufficient commonality of interests and philosophy to continue to discuss a joint venture. Often the most important aspect of these sessions takes place after hours where the senior staff and the boards of the credit unions get to know each other on a personal basis and trust and comfort is found-or not found. Tom has found that it is the board members in particular that need this personal interaction time. This interaction time is most important when the CUs are not geographically close. There is a trend for geographically diverse credit unions to unite in joint ventures in order to avoid the competitive issues that are becoming common with overlapping fields of membership.
If the right fit exists, there will be excitement and passion for the possibilities of the CUSO. This passion translates into mutual support among the credit unions, which will empower the enterprise.
Now that marriage looks like a strong possibility, it is time to discuss the nitty-gritty of the relationship. This is not romance. This is the down-and-dirty side of determining how this relationship will be structured. Typically, the CUSO will be a limited liability company and the provisions governing the relationship will be contained in the operating agreement. The following is a sample of some of the critical questions that have to be asked and thoughts on how to deal with them.
Are there any limitations on who can be an owner (called members) of the LLC? Will the CUSO be limited to natural-person credit unions? Could a league be an owner? Can a non-credit union entity be an owner? Can natural persons be owners? Depending on the strategic goals of the organizers, there could be limitation on who can be an owner. I will note that any time a credit union partners with a non-credit union entity or person, there is the strong potential for different goals among the owners. For example, credit unions are often more concerned with the service function of the CUSO to support the credit union and/or enhance their relationship with their members than they are on the profit motive. Non-CU owners will most likely be primarily interested in the profit or growth of equity goals. This leads to disputes, and is why the exit strategy is very important.
How will new owners be admitted and on what terms? Typically, this is an item that requires the unanimous consent of the owners. The owners can establish the admission cost for the new owners at the time of their admission to the LLC. There is no need to try and predict the future. The owners can decide what is appropriate at the time the decision is made. Absent a strong need to bring in new owners for capital or business reasons, there should be a premium for new owners to join above the cost of the original owners who took the bigger investment risk of investing in a start-up business.
Profit and Loss
The usual method of splitting profit and loss is based on the percentage of ownership. However, many credit unions want to reward the users of the CUSO services and provide incentives to the owners to use the services. In CUSOs providing operational services, this can be done through a tiered pricing structure that rewards heavy usage. The profit and loss model does not have to be adjusted. In CUSOs providing financial services, all or part of the return is sometimes based on the volume of business that is generated by the owners, with caution taken to ensure this method does not violate laws, such as RESPA.
Guy Messick is an attorney with the law firm of Lastowka & Messick P.C., and legal counsel to NACUSO. He can be reached at 108 Chesley Dr., Media, PA 19063, at 610-565-0330, or at gmessick