5 Key Items to Consider When Leveraging CUSOs to Drive Growth
In an effort to expand services and enhance non-interest income, many credit unions are exploring investing in, acquiring or forming credit union service organizations (CUSOs). CUSOs provide opportunities for collaboration, enabling credit unions to remain competitive in an ever-evolving financial and technological landscape. If your credit union is contemplating leveraging a CUSO, here are five key considerations to help you get started.
1. Clearly Define Your Objectives
Understanding your credit union's goals is crucial when considering your CUSO strategy. While growth is often the primary objective, there are several other reasons CUSOs are a compelling strategy for credit unions, including:
- Expansion of products and services: CUSOs allow credit unions to expand their product and service offerings without developing them internally. For example, a credit union can collaborate with a mortgage lending CUSO to provide a broader range of mortgage products to its members.
- Cost savings: Credit unions can reduce operating expenses and improve efficiency by outsourcing certain functions to CUSOs, such as marketing, information technology or professional services.
- Increased revenue: Create new revenue streams by partnering with CUSOs offering complementary products and services. For example, a credit union offering auto loans can partner with a CUSO providing car insurance to offer a bundled product to members.
- Collaboration and networking: Leveraging CUSOs allows credit unions to collaborate and network with other credit unions and industry players. They can provide a platform for credit unions to share best practices, exchange ideas and collaborate on new initiatives.
- Risk mitigation: CUSOs provide credit unions the ability to minimize their risk exposure and limit liability by sharing risks associated with new products and services with other partners.
2. Implement Your Plan of Action
Consider the options available when it comes to your CUSO strategy:
- Investing in a CUSO: Credit unions can purchase an existing ownership interest in a CUSO or provide capital and/or debt financing in a new investment round. Becoming an owner allows you to share in the rewards (profit distributions) and risks, as well as participate in the strategy, direction and growth of the CUSO.
- Acquiring an established company: Credit unions can acquire an established company and form a CUSO, which provides them with immediate control and access to its products, services and expertise. Conducting thorough due diligence and analysis is crucial to assess the company’s valuation, financial health, operations and regulatory compliance before making a purchase.
- Forming a new CUSO: Developing a business plan, securing funding, choosing a legal structure, obtaining licenses and permits, and establishing operational procedures are necessary when forming a new CUSO. Creating a new CUSO can provide credit unions full control over the organization, allowing them to tailor it to meet their specific needs and goals.
3. Select the Appropriate Legal Structure
Determining the legal structure for your CUSO is essential. Overall CUSO strategy, number of entities, business types, and ownership amount and type are among a number of important considerations that will determine the appropriate legal structure. This is also critical to help minimize legal liability to credit union owners.
4. Ensure Proper Funding
If forming a CUSO, obtaining the necessary funding is key. This may involve securing investments or loans from the credit union, other outside investors, or a combination of these approaches. The funding should be based on a formal business plan and financial projections that include the expected cash-flow needs for the CUSO over the first three years.
5. Perform Ongoing Monitoring and Due Diligence
Just because it has done everything right on the front end does not mean a credit union can stop monitoring risk. Depending on the level of ownership or participation in a CUSO, the credit union must monitor financial performance and be aware of audit and regulatory compliance issues faced by the CUSO, as it will impact the credit union.
Where to Begin
Weighing the potential benefits, risks and financial and legal implications are all key items to consider when it comes to determining if a CUSO is right for your credit union. Working alongside trusted advisors, like those at Doeren Mayhew, can help ease the process and provide clear guidance in your decision. Contact us today to learn more about our M&A strategic advisory services. Securities offered through Doeren Mayhew Capital Advisors, LLC. Member FINRA/SIPC.