Community Right to Bid: Step 4
Getting ready to bid
The key elements of project development are:
- project objectives – what do you want to achieve?
- site – all the property issues
- people – your organisation, who will do the work, who will support the project
- finance – having sufficient finance in place to make a bid
The right to bid is a ‘pre-emptive right’, so you should keep in mind that you will be working to a tight timescale if you opt to trigger the moratorium or ‘stop the clock’ and deploy the right to bid in earnest (see: Step 5). If at all possible, plan to have everything in place well in advance of being notified of an owner’s intention to sell an asset of community value.
Although these guidance notes relate to property, the community value is always realised in the ways that land and buildings are actually used. As such, the project objectives – what you want to achieve through acquiring an asset of community value – are crucial. For more detailed information about setting project objectives and the work involved in a property projects, see: To Have and To Hold (2009).
You will need capacity within your organisation to acquire and manage an asset – this might include volunteers or paid staff. Be realistic about the amount of work this is likely to entail, and assess whether you have enough people with sufficient time and skills to progress the project and achieve your over-arching objectives. If you are not already a constituted organisation, you will need to set up your organisation in order to trigger the moratorium and proceed to solicit funds, bid for and take ownership of an asset. How it is constituted – for example as a charitable company, community interest company or industrial and provident society – will ultimately depend upon your aims and plans for the asset.
At every stage, you should test whether you can achieve your objectives with the property you are considering. Inevitably, compromises will need to be made, but if you regularly check back against your original objectives, you will ensure that the core of the project remains intact.
Before making a decision to bid for an asset, it is important to understand as much as you can about it, including:
- its condition and state of repair
- its current and recent uses
- any constraints or covenants affecting its use or management
- how it fits with wider local plans for the area.
It is sometimes difficult to access information about an asset of community value you want to bid for but you should, wherever appropriate, ask for as much as possible to assist you in planning ahead.
For buildings, a thorough Building Survey is required to identify such issues as structural integrity, water-tightness, conformity with current Building Regulations, damp penetration, infestation/ infiltration of timbers etc. If the property needs work to bring it up to an acceptable standard, the survey will identify this and will usually provide a broad brush estimate of the costs involved. Further information on taking forward and managing a building project can be found in To Have and To Hold (2009).
The property may have a great many issues to resolve, but being aware of these enables you to plan for its successful management and convince potential investors of the viability of your project. Not all of the costs will be upfront, and being aware of the full cost of owning the building over time will add to the credibility of the project. Beyond the initial cost of acquiring the building this might include refurbishment costs, rates, facilities management, utilities and end of life cost. The Building Calculator – can help you understand and plan ahead for your operating and maintenance costs. Alternatively, you should seek professional input to help you calculate them.
If the asset in which you’re interested is liable to need building works – particularly if you intend to change the internal layout significantly or extend the property prior to occupation – then try to ensure that the changes to your building will fit with your planned uses for the asset. Getting it right first time will save you money and avoid disruption in future. Consider capital works which can substantially reduce your running costs – see, for example, the Green Asset Guide for ideas around developing your building to high environmental standards – meeting your environmental goals and cutting your on-going fuel costs.
Consider also the use of the building, access and security as part of any new design – getting right the layout and access can make the building easier and cheaper to manage.
It is important to understand the current and recent uses of the building. If your planned uses are different to those for which it has been used in the past, then you may need to apply for a change of use. If you intend to extend or structurally alter the building, you might also need planning permission. Your local planning department should provide informal advice free of charge to community organisations about the need for planning consent, and key issues which could affect the granting of planning permission. Does your offer for the property need to be conditional on gaining planning permission? If so, this is something you will need to understand and explore in advance of triggering the moratorium, soliciting investment finance and proceeding to bid for the same.
It is important to check whether there are any constraints on the use or management of the building. Is it a listed heritage building? If it is, there will be restrictions on, for example, changes to the structure of the building and types of building material which are acceptable. This will increase the cost of repair and refurbishment, and constraints on changes to layout may make it unsuitable for your purposes. Are there any covenants on the property? Covenants place legal restrictions on the property, for example, restricting use of the property or the people to whom it may be sold. Common restrictions on use include specific types of retail and restrictions on the sale of alcohol or gambling.
Fit with local plans
If a sale is subsequently agreed your solicitor will carry out formal searches as part of the legal process. However, at this stage, you should review plans for the area to check if they impact on your asset in one way or another. For example, if you are looking to acquire the village shop, plans for a new housing estate could be good news bringing lots more potential customers, whereas plans for a by-pass of the village or re-routing the bus service could be a problem meaning that potential customers will need to divert from their journey to visit your shop. What to avoid It is important to avoid making a decision in ignorance and isolation. Site selection is rarely carried out without emotion or instinct influencing the process. A strong emotional attachment to a period building, or a strong gut-instinct for the wider regeneration benefits of a particular site and location, may well be the over-riding driver behind the decision. There is nothing wrong with this, as long as the associated risks to the project have been identified, and a strategy for limiting/managing the risks has been put in place.
Building your business case
Once you have the information you need about the asset you want to bid for, you will need to build a business case. This will ensure that your plan for purchasing, developing and managing the asset is feasible (it can be achieved in the short term), sustainable (it will cover its costs and be manageable in the long term) and credible (your organisation has the required skills or can draw on the skills of professionals for the knowledge and capacity to deliver it). If you cannot demonstrate that your plans are feasible or that your organisation is credible, you may struggle to attract the finance needed for your bid.
A business case is usually made in the form of a written business plan. This explains how you will purchase, develop and manage the asset, and should include an explanation of the finances of the project, covering capital costs (any up-front investment costs required), revenue costs (ongoing running costs), and the different income streams (either from the asset itself or from related enterprises) that will make the project sustainable.
At this stage, you may be able to apply for a feasibility grant through the Community Ownership and Management of Assets support programme to help with the costs of building your business case. For further information, see the My Community Rights grants information.
Things to think about before you start drafting your business plan
Before you start investigating or writing a business plan for purchasing and managing a community asset, you should stop and think about six key elements. These elements do not reflect how the business plan should be written, but they are the underlying principles that need to shine through your plan.
Quality of information
The importance of quality information cannot be overstated. In addition to the property related research set out in the section above, you will need to undertake market research about:
- local community need
- potential users and customers.
There is a range of sources of information which can provide evidence for the need for your project and also its potential users and customers:
- statutory sources – local authority surveys of local need, census data, deprivation indexes
- anecdotal evidence – personal testimonies about need and opportunity: these can often bring your plan to life
- information about similar projects.
Whatever you are planning to do, there will be others elsewhere who have done something similar, so if you can identify similar projects and show that your plan is based on facts rather than hypothesis, you will build credibility into your Building your business case business case.
But don’t just describe these projects, relate the information to your plans for your asset of community value in your area. Dedicate time to research into any contracts and/or enterprises you intend to manage in order to generate an income.
Running a business
Whether your plans are around the local shop or the community centre, you will only preserve this as an asset of community value if you can manage it for the long term. This means having enough income to meet your costs. Though your motivation is around meeting the needs of your local community, you need to take a business based approach. Identify what you aim to provide in the building, then ask:
- who are the users/customers, how many of them are there?
- what will they pay?
- who are my competitors, i.e. organisations providing similar services?
- why will customers buy from my organisation?
Being established for charitable or benevolent purposes is not enough to guarantee customers. For many of the services you consider, there will be a local market rate – whether that is for sessional room hire or a cup of latte in your café. You need to be confident about your market if you are offering specialist, luxury or niche products – remember, people can buy cheaper alternatives or do without.
- Don’t confuse a need and a market – Your health statistics may show that there are a lot of unfit people in your area but, at least initially, the customers for a community gym are much more likely to be people who are already involved in and enjoy exercise
- If you are taking over a business which is a going concern, find out why the owner is selling and don’t accept their figures on customer numbers and size of sales – find out as much as you can from the seller and carry out your own research
- Don’t design your research just to back up your proposals – If your plans will not work, you need to know sooner rather than later.
Good business planning involves scenarios. This is different to plotting different plans or objectives. Sensitivity analysis is the plotting of one plan and the effects on that plan in good times and bad. Typical sensitivity analysis on profit and loss and cash flows involves plotting a variance on the business (usually on levels of income, but sometimes also on costs). What happens if you get 10% or 20% less customers than you expect – or 40% more?
This will allow you to:
- spot potential problem areas with your prospective business
- develop a more robust business model
- ensure you develop sufficient working capital for all eventualities.
Working capital budget
Working capital is defined as the cash on hand to conduct business before a profit is realised. Most businesses take several years before they begin to generate significant profits. Be realistic in your plans for business growth.
Cash-flow takes annual projections of income and expenditure and looks at when the income and expenditure is likely to occur. Most cash-flows work on a monthly basis. Think of when you will receive income – for example, if you are looking to run a shop or a pub in a tourist area, most of your income is likely to come in during the summer months. However, your expenditure is likely to remain reasonably constant.
Most businesses forego this planning because they feel it identifies a weakness in the plan. On the contrary, good cash-flow (working capital) design and management often allows a business to thrive while others fail.
To create a budget, your plan must identify the cash movements (i.e. income and expenditure and when it will happen):
- over the development period
- during the transition period (the set-up of the service)
- during the early stage of operation where many unknown expenditures are likely to occur.
Understanding the cash-flow is understanding the business.
Integration of resources and vision
Remember that your social outcomes are an absolutely essential part of your business case, and likely to be critical in attracting investment and other support. Your business planning should therefore investigate and, ultimately, clearly demonstrate the positive impact your community owned asset will have in social, economic and/or environmental terms.
Managing an asset and running a business entails risks – from lower than expected income to fire and flood. Some of these risks are remote, others are quite likely to happen. You should carry out a risk analysis – pages 83 and 84 of To Have and To Hold provide guidance on identifying and managing risks.
Writing the business plan
The quality of the final business plan will go a long way to determining whether you will manage to raise sufficient investment funding (capital costs, set up costs, working capital) to be successful with your bid to buy the asset. Key factors in writing a business plan are:
- Clarity: Give the business plan to a friend or colleague who does not do the type of work you want to take on. Do they understand what you are asking for and why?
- Brevity: You should be able to summarise your plan (often called the ‘Executive Summary’) in one page. If you cannot state your case in one page, you do not sufficiently understand your plan. The length of the whole plan will depend on the nature and scale of the project, but as a guide the main section should ideally not exceed 20 pages. Place supporting data and other documentation into appendices where your audience can view as needed. It is your job to extract the relevant and correlated data and explanations into the main business case. Of course, the length and complexity of your business plan will be different if you want to purchase and manage a small space compared with something larger or more complex.
- Story: The business case must tell one story in different ways:
- Personal experiences: Include real customer/client experience(s) to move the business case beyond numbers, drawing the reader into the plan – tell the stories of how your local community will benefit from acquiring this asset.
- Format: Use formatting to tell your overall story. This includes the provision of extra white space on the page, pictures interlaced with text, and a magazine style layout. Layout is critical to both the perceived competence of your plan and the readability
- Data: This should help to tell your story effectively. Think about using data in different formats throughout the business case (charts, text, pictures).
Outline of a business plan
The business plan should cover five areas:
- People: Who is implementing the plan and what is their background?
- Market: Who is the client and what is the need?
- Product / Service: What is the business model and how is it delivered?
- Finance: How does your plan work financially?
- Community Benefit: What community benefit will your plan produce? Who will benefit and how will this be measured and demonstrated?
Investors will look at:
- are the people involved credible – are there enough of them – do we believe that they can acquire and run this building successfully, is our money safe with them, are they taking appropriate advice?
- is the business model viable and does the organisation fully understand its business model – is the pricing right, are there likely to be enough customers, is there too much local competition, are the costs realistic?
- does the organisation understand the risks involved and is it proposing sensible measures to mitigate those risks?
What to avoid
Business planning must be about clearly identifying and then telling your story. Whilst you will use the business plan in a range of ways, remember that in the first instance it is a tool for your organisation to use. You need to satisfy yourselves that your organisation has the capability to manage the asset in the long term and that you can come up with a viable business model. Gathering and analysing the information you needed to draw up the plan will allow you to make a realistic assessment of whether your organisation should bid for the asset. Business planning can be a process of discovery.
But, during the process, watch out for the following pit-falls:
- Sticking with a bad business model: Don’t force the plan if it does not work. Stop and rethink the basic premise of the plan. Gathering data around a flawed model is only fooling yourself.
- Not paying enough attention to cash-flow and working capital: Cash is king! Even if your income over a financial year exceeds your expenditure, you still need to ensure that you have enough cash on hand to cover your month to month expenditure. So plan your cash flow and ensure you have enough working capital.
- Scenario planning without sensitivity: Many organisations develop three scenarios and mistake this for sensitivity analysis. It is only sensitivity analysis if each scenario has the same baseline assumptions for costs and structure, but illuminates the effect on the business of varying income streams and costs.
- Make sure you do a sensitivity analysis for your chosen business model: You cannot get all the assumptions right first time. What happens if income or expenditure changes?
- Bad formatting: Who wants to read a boring or a poorly constructed plan?
- Not understanding your audience: Your plans should start as a plan for your organisation but it may need to be adapted to meet the needs of external audience(s). Make sure your plan includes all critical data – particularly any that the investor has specifically asked for – and don’t forget to explain the social value of the project.
- Lack of clarity: edit your business plan so that it is clear, concise and easy to read.
Start doing your research work on this as soon as you consider bidding for an asset of community value. It takes time to attract investment and you need to find out:
- Potential sources of funding for your project
- Funders’ criteria and relevant timescales
Investment can include grants, loans or equity. Many successful projects will blend these elements.
Grants, gifts and donations are the most attractive because they are free. There are numerous sources of grant funding, and new initiatives are launched all the time by national bodies such as the Big Lottery Fund as well as various trusts and foundations. However, be aware that only a small number will cover capital costs to help with your building.
Key considerations in relation to grant funding and deployment of the Community Right to Bid are:
Many grant funders have long lead-in times for applications. These may be longer than the moratorium period of six months. Others will not consider an application until you actually own the property (i.e. have the freehold or a long leasehold), so may support refurbishment or redevelopment costs but not the acquisition of the property itself. You should check out timescales and restrictions as part of your research. If you are seeking grant funding to buy the property, then you may need to consider contingency plans if your application is not successful (e.g. loan finance).
Most grant funders seek to support key activities of benefit to the community, rather than property assets. So, support around acquisition or refurbishment of property may need to be linked to the wider development and delivery of key services i.e. the social value. Your search for appropriate funders should focus on those keen to support the types of services and user groups with which your organisation will work.
Where can I find out more?
Many local Councils for Voluntary Service (CVSs) and Rural Community Councils (RCCs) employ funding advice workers and can offer access to funding databases.
My Community also has a detailed listing of funding available here.
Debt finance comes in a variety of forms, and its ‘cost’ will depend on whether the loan is secured/unsecured, the repayment period, fixed/variable interest rates, arrangement fees, penalties, etc.
Sources of loan finance include high street banks, some of which have specialist teams dedicated to the charitable sector. There are also a number of government backed Community Development Finance Institutions (CDFIs), which provide finance to qualifying social enterprises. The vast majority of these are local and subregional, although there are a number of larger CDFIs that operate regionally and nationally. Visit CDFA for a list of CDFIs. Many of these loan providers also provide added value through advice, support, training and capacity building which is often absent from commercial lenders and grant funders.
Loan finance is often easier to access, particularly within the restricted timescales of the moratorium. But loans have to be paid back – remember to include this in your financial projections. It is important to remember that loan funders will go through a process of ‘due diligence’ prior to agreeing the finance. This will definitely include a detailed financial analysis and may include provision of evidence that the Board of your organisation has approved the detailed terms of the loan as well as background checks on Board members. Ask your loan funders about what is required early in the process as otherwise this can result in considerable delays in getting access to the funding.
Community investment is a way of raising money from communities through the sale of withdrawable shares or equity in order to finance enterprises serving a community purpose. There has been a recent increase in the number of community projects using this method of raising finance, including local shops and pubs, hydro-electric schemes and football clubs. Most often, organisations interested in securing community investment will utilise a specific legal structure: the Industrial and Provident Society for the benefit of the community.
Practical resources and advice on how to prepare for and launch a community share issue, along with case studies from across the UK, are available via the Community Shares website.
How your organisation is constituted makes a big difference to the cost of a share issue. If you are considering this as a way of raising capital, then you should take advice at an early stage.For detailed information on finance options, head to our Raising Finance section