Vital Steps. A cooperative feasibility study guide. U.S. Department of Agriculture Rural Business-Cooperative Service Service Report 58

Transcription

1 Vita Steps A cooperative feasibiity study guide U.S. Department of Agricuture Rura Business-Cooperative Service Service Report 58

2 Abstract This guide provides rura residents with information about cooperative deveopment feasibiity studies. It defines the feasibiity study and discusses their necessity and imitations. First steps in feasibiity study deveopment are described and key actions, incuding important components of a comprehensive study, are detaied. Aso offered are criteria for seecting and working with consutants, information for deveoping assumptions, and study assessment factors. Key words: feasibiity study, cooperative deveopment, consutant, assumption, decision. Vita Steps: A Cooperative Feasibiity Study Guide John W. Brockhouse, Jr., and James J. Wadsworth competed the revision of this guide. The report was first authored by James Matson in 2000 whie he was empoyed with Rura Deveopment. The authors acknowedge revision contributions from Bruce Peasant, with USDA Rura Deveopment in North Caroina, and James Matson, now a private consutant based in South Caroina. Pubications and information are aso avaiabe on the Internet. The Cooperative Programs Web site is at: December 2010 i

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4 Contents The Cooperative Business Deveopment Process Definition of a Feasibiity Study What Is a Feasibiity Study? Why Prepare Feasibiity Studies? Lender Considerations Feasibiity Study Limitations First Steps in Feasibiity Study Deveopment Step 1 Decide Whether To Proceed With a Study Step 2 Define the Project Step 3 Group Commitment and Leadership Use of Advisors and Consutants Step 4 Understand Sound Group Decision-making Feasibiity Study Key Actions Deciding Who Wi Conduct the Study (Consutant Seection Criteria) Feasibiity Study Working Reationships Deveopment of Project Assumptions Determining Components of the Feasibiity Study Report Executive Summary Introduction Industry Background Marketing Operationa and Technica Characteristics Financia Statements and Projections Summary and Recommendations Appendix Accepting/Rejecting the Study Group Decisions After Accepting the Study Appendix A Sequence of Events in Cooperative Deveopment Appendix B The Feasibiity Study vs. the Business Pan Appendix C Sampe Feasibiity Consutant Seection Criteria Appendix D USDA RD Summary Guide for Feasibiity Studies Incuded in Appications for Business & Industry Loan Guarantees (Instruction 4279-B) Appendix E Sampe Pro Forma Cash Fow Appendix F Sampe Pro Forma Income Statements Appendix G Sampe Pro Forma Baance Sheets Appendix H Sampe Pro Forma Ratio Anaysis References and Information Sources Figure 1 The Cooperative Business Deveopment Process Figure 2 Guideines for Group Decisions Figure 3 Key Actions for Feasibiity Studies Figure 4 Criteria of a Good Feasibiity Study Consutant Figure 5 Questions for Deveoping Assumptions Figure 6 Exampe Outine of Feasibiity Study Report Components iii

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6 Cooperative Feasibiity Study Guide John W. Brockhouse, Jr. James J. Wadsworth The Cooperative Business Deveopment Process In most cases, deveoping a business is a compex undertaking that consists of a number of stages. In cooperative deveopment, foowing a step-by-step deiberative process is important because of the need to review progress and obtain input from potentia members after each step before making a decision about whether to proceed with the project. The report "How to Start a Cooperative" (RBS CIR 7), presents a 16-step sequence of events recommended for creating a cooperative business (see Appendix A). This guide eaborates on the seventh of the 16- step event sequence: conducting a feasibiity anaysis. A feasibiity study is an integra part of cooperative business deveopment. Conducting a feasibiity study is not a theoretica research project, but rather is a focused study for a specific group that wants to expore forming a cooperative business. Figure 1 condenses the sequence of events of the cooperative deveopment process into four stages and shows how the feasibiity study fits within that process. The feasibiity study occurs during the deiberation stage when the focus is on whether to proceed with a project. (It shoud be noted that the steps in Figure 1 are sometimes approached and competed in a different order than shown. The specific order of the steps taken in a deveopment project wi be contingent on the type of venture being expored and the wishes of those invoved.) The amount of time required in the cooperative business deveopment process depends on the compexity of the proposed business and the attributes of the group invoved. Typicay, it takes 1 to 2 years for a cooperative deveopment project to be competed, athough there are some cases where projects are competed faster and others that take onger. The time needed to compete the feasibiity study step varies widey from project to project, again depending on the characteristics of the group requesting the study, as we as the specific aspects of the venture, such as technoogica compexity, project scae, marketing conditions, member invovement, and financia panning factors, etc. However, a good rue of thumb for the feasibiity anaysis step for most deveopment projects is 3 to 6 months. Definition of a Feasibiity Study This section carifies what a feasibiity study is by providing an extensive definition, expaining why studies are conducted, outining their imitations, and defining the process of a feasibiity anaysis through the identification of four key factors. What Is a Feasibiity Study? A feasibiity study is an anaytica too used during a business deveopment process to show how a business woud operate under a set of assumptions. These assumptions often incude such factors as the technoogy used (the faciities, equipment, production process, etc.), financing, (capita needs, voume, cost of goods, wages, etc.), marketing (prices, competition, etc.), and so on. The study is usuay the first time in a project deveopment process that many key pieces and information about the project are assembed into one overa anaysis. The study must show how we a of these pieces fit and perform together. The resut wi be an overa assessment of whether the proposed business 1

7 Figure 1 The Cooperative Business Deveopment Process* Identify economic need Leaders and other potentia member-users identify the economic need the cooperative might fufi. A steering committee of potentia member-users is seected to guide the project. Deiberate Deveop an overview of proposed business operations. Survey prospective members to determine the potentia use of a cooperative. Conduct a feasibiity study. - Economic - Marketing - Technica - Financia - Management Deveop a business pan. Impement Prepare ega papers and incorporate. Eect a board of directors. Impement the business pan. Conduct a membership drive. Acquire capita and deveop a oan appication package. Execute Hire the manager. Acquire faciities. Begin operations. * See Appendix A and CIR 7 - How to Start a Cooperative, for more information on these stages and the individua steps invoved in the entire deveopment process. concept is technicay and economicay feasibe. Feasibiity studies shoud aso provide sensitivity anayses of the business given changes in key assumptions. One shoud note that a simuation or projection mode, whie usefu, is not a substitute for a comprehensive feasibiity study. This type of mode is sometimes used in a pre-feasibiity study done eary in the project timeine to provide a first-cut evauation of the proposed business idea. The feasibiity study evauates the project's potentia for success. The perceived objectivity of the evauation is an important factor in the credibiity paced on the study by potentia members, enders, and other interested parties. For this reason, it is important to hire a consutant with no forma ties to equipment manufacturers or marketers, for exampe, so that an unbiased evauation of operating potentia and efficiency can be made. Aso, the creation of the study requires a strong background both in the financia and technica aspects of the project. For these reasons, outside consutants conduct most studies, athough the project eadership normay has input as we. Feasibiity studies for a cooperative are simiar to those for other businesses, with one exception. Potentia members use the feasibiity study to evauate how a cooperative business idea woud enhance their persona businesses rather than to determine the return on investment they woud receive on invested stock. A study conducted for an agricutura marketing cooperative, for exampe, must address the project's potentia impact on members' farming operations in addition to anayzing economic performance at the cooperative eve. In other cases, such as food cooperatives, the vaue to the member is access to consumer goods or services, possiby at ower prices, and is not based on the economic return to the cooperative itsef. Cooperative businesses are deveoped first and foremost to serve members' needs and enhance their economic we-being. However, to do so, they must operate efficienty and compete effectivey in the marketpace. Why Prepare Feasibiity Studies? Deveoping any new business venture is difficut. Taking a project from the initia idea through the oper- 2

8 ationa stage is a compex and time-consuming effort. Most ideas, whether a potentia cooperative or an investor-owned business, do not deveop into an operationa entity. When ideas do make it to the operationa stage there is a high faiure rate (many within the first 6 months). Thus, before potentia members invest in a proposed business project, they must determine if it can be economicay viabe and then they must decide if investment advantages outweigh the risks invoved a feasibiity study is the means by which these decisions are made. Without feasibiity studies the percentage of startups that fai woud be higher. Many cooperative business deveopment projects are fairy expensive undertakings that can aso be confusing to potentia members. Proposed cooperatives often invove operations that substantiay differ from those of the members' individua businesses, and cooperative operations may invove risks with which the members are unfamiiar another reason that a feasibiity study is so important. It shoud provide a cear understanding of project risk to hep members decide whether to invest in the proposed business. Members participate in the deveopment of the feasibiity study and thus are educated about various aspects of the project, which wi hep them decide whether to move to the impementation stage. In addition, this knowedge heps prepare members of the steering committee to become the board of directors, as often happens if the project is impemented. Whie the costs of conducting a study may seem high to the potentia members, they are reativey minor when compared with the tota project investment that wi be required. The expenditure for a feasibiity study is actuay inconsequentia if it saves an unprofitabe venture from going forward, thus preventing the arger capita investment needed to start most new businesses, as we as the time and effort invoved, from taking pace. And if the study shows that a project is indeed feasibe, it provides the group with some concrete usefu data that can be used in subsequent business pans and projections. Feasibiity studies are usefu and vaid for many kinds of business deveopment projects. Evauation of whether to start a new business, by either new groups or estabished businesses, is the most common, but not the ony usage. Studies can hep groups decide to expand existing services, buid or remode faciities, change methods of operation, add new products, or even merge with another business. A feasibiity study assists decision-makers whenever they need to consider aternative deveopment opportunities. Feasibiity studies permit panners to outine their ideas on paper before impementing them. This can revea errors in project design before impementation is made. Potentia stumbing bocks can be identified and decisions made about whether they coud be effectivey addressed if the project goes forward. Appying the knowedge gained from a feasibiity study can significanty ower overa project costs by keeping adverse designs and panning concepts from being made. A feasibiity study presents and carifies the risks and returns associated with the project so that prospective members can evauate them. There is no "magic number" or correct rate of return a proposed cooperative needs to obtain before a group decides to proceed. The acceptabe eve of return and appropriate risk rate wi vary for individua members depending on their respective persona situations and need for the proposed services of the cooperative. Lender Considerations A proposed project usuay requires both risk capita from members and debt capita from banks and/or other financiers to become operationa. Lenders typicay require an objective evauation of a project when they consider a oan investment, and a feasibiity study often provides the first ook at those aspects. Whie some groups often try to invove a ender eary in the process, a feasibiity study is often conducted with an eye toward expaining the project to potentia financiers. Lenders have different requirements from the study than group members. Lenders are most interested in the project's abiity to pay back oans whie group members are interested in the benefits to them of using the cooperative. Many groups work with enders with whom they have an estabished persona or business reationship. This may expedite the process of obtaining financing. Nevertheess, the ender must know and understand the unique aspects of cooperatives and fuy understand the characteristics and potentia of a proposed project. The feasibiity study wi hep them in this regard. Lenders' primary concerns focus on repayment, their risk exposure, and a project's strengths and weaknesses. Lenders cassify these concerns into the "5-C's": Capacity what is the group's abiity to repay the oan? Capita what assets are being financed with the oan and how much is requested? 3

9 Character who are the principas of the project? What is their background? Coatera what is being used to secure the oan? How is it vaued? Conditions what additiona factors can affect the oan? The odds for financing diminish if a ender does not fuy understand the project and is unabe to review the potentia financia resuts through a sound economic and financia anaysis. Success or faiure of a business opportunity often hinges on obtaining adequate ender financing. For this reason, it is often a good strategy, if possibe, to consut with potentia enders prior to conducting a feasibiity study to determine what factors they wi focus on given the type of project. Such a consutation can shorten the time that a ender needs to approve project financing, or even improve the abiity of securing financing. However, whie a feasibiity study is important for providing information that wi hep in gaining finances from a ender, it shoud not be conducted merey to prove to them that a project is viabe. It must ony be undertaken when the proposed project is being seriousy considered for impementation by dedicated potentia members. Feasibiity Study Limitations Athough a feasibiity study is a usefu too for project deiberation, it has imitations. A feasibiity study is not an academic or research paper, but is a pragmatic information and data anaysis document. It is confidentia to the group for which it is conducted, and is not for pubic dissemination. A competed study shoud permit a group to make better decisions about the strategic issues of its specific project. The study is aso not a business pan, which is deveoped ater in the project deveopment process and functions as a bueprint for a group's business operations for impementation (see Appendix B). Given a group's decision to proceed after evauating a feasibiity study's resuts, the business pan presents the group's intended responses to the critica issues raised in the study. Many of the outcomes presented in the feasibiity study form the basis for deveoping a business pan if a decision to proceed is made. A feasibiity study is not intended to identify new ideas or concepts for a project. These ideas shoud be ceary identified before a study is initiated. Assumptions that are partiay deveoped from these ideas provide the basis for the feasibiity study, so the more reaistic they are, the more vaue the study's findings wi have for a group's decision-making. A study shoud not be conducted as a forum merey to support a desire that a project be successfu. Rather, it shoud be an objective evauation of a project's chance for success. Even studies with negative concusions are usefu for group decisions. As stated earier, financiers may require a feasibiity study before providing oans, but this shoud not be a study's ony purpose. Athough a study can enhance a banker's abiity to evauate a project, the primary goa shoud be to aid a group's utimate decision on going forward, not ony whether financing can be secured. A feasibiity study wi not determine if the project wi be initiated, since that depends on the potentia members, who wi invest in and become the owners of the business. However, the information, data, and facts offered in a study, given reaistic assumptions, provide the basis for a decision. Potentia members must decide if the benefits justify the risks invoved in their continuing the project and the study findings wi assist them in that assessment. A study uses basic project assumptions to deveop an anaysis, shows how resuts vary when assumptions change, and provides guidance as to critica eements of a project. Conducting a study shoud provide the group with project-specific information to assist it in making decisions. This shoud ower the risk of continuing with a business deveopment project that utimatey woud fai. First Steps in Feasibiity Study Deveopment Some initia steps must take pace as a group progresses toward fuy assessing a project. First, the group must decide on whether to proceed with a feasibiity study. Second, the project must be accuratey defined. Third, there must be strong commitment and eadership from the group, and fourth, those invoved must fuy understand the process of making sound decisions. Step 1 Decide Whether To Proceed with a Study The first step for a group to take is to fuy deiberate the necessity of even conducting a feasibiity study. The group must carefuy consider whether it is ready and prepared to have a study conducted. Because a group's resources are ikey imited, it is important that the group be ready to proceed with the project and the feasibiity study before aocating the necessary resources. It coud very we be that the 4

10 study needs to be put off unti another time because of a ack of support from prospective members, not enough capita to proceed, or any other given reason. Once the decision is made to invest the time and resources in a feasibiity study, the group proceeds to define the project. Step 2 Define the Project In a successfu cooperative deveopment project, a core group of peope must fee a strong need to work together to sove a probem or take advantage of a business opportunity. Working together provides the context for a cooperative business project. What the project wi entai must be understood and the group must beieve the idea is worth pursuing. Often, a few individuas provide the spark for an idea, but group interaction permits them to hone an idea and deveop sufficient interest. When defining a project eary on, a group often discovers common interests that a potentia cooperative business may be abe to address. Cooperative businesses work best when participants see a mutua benefit from working jointy rather than acting aone to achieve a goa. Members vountariy choose to beong to a cooperative because they see some potentia benefit. When a project can be addressed jointy, potentia member interest exists, and benefits are possibe, then a cooperative can be the soution. To ceary define a deveopment project, a number of factors shoud be incuded in speing out the project idea. The project idea shoud be: Leaders and other potentia member-users identify the economic need the cooperative might fufi. Understandabe (described in such a way that the objective is cear); Significant enough to warrant group action; Capabe of providing economic and/or technica soutions to a probem or opportunity; Economicay and sociay fitting for a group; and Considered a reasonabe business soution. When a these eements exist in a project idea, the potentia exists for deveoping a successfu cooperative. If any are acking, the concept shoud be rethought and the project definition revised before proceeding with the feasibiity study steps. A carefuy defined project idea wi provide the steering committee and group with a foundation from which to judge the project as it proceeds. Here is an exampe of a project idea statement: A member-owned cooperative that wi process and market members' soybeans for the farmers of ABC vaey, to meet the area's high demand for soybean mea and soybean byproducts, and to provide strong vaueadded economic benefits to members. The group then may provide some key points in addition to an idea statement to further carify how the project wi meet necessary economic, business, and technica factors. Step 3 Group Commitment and Leadership For a cooperative deveopment project to have a chance at success, it must have individuas invoved who are committed to the defined idea. A critica mass of potentia members shoud be invoved because having sufficient support for a proposed concept is crucia. The specific number for a critica mass wi of course depend on the type of products invoved, the scope of what the business wi do, and the economic resources that wi be needed. A smaer number of individuas who are fuy committed to a project, provided they have sufficient product, capita, or demand for services, can have a higher chance of success than a arger number who are ony partiay committed. Thus, the key is not necessariy the number of peope invoved, it's the eve of commitment they have. Athough when a deveopment project is a compex endeavor that wi invove a highy technica processing pant (for exampe, an ethano or biofue processor, or a meat pant or grain mi), then having a arger number of committed peope becomes very important. Ceary, commitment and oyaty to an idea cannot be overstated. It can be measured severa ways, such as attendance at organizationa meetings, positive potentia member survey resuts, the amount of wiingness to become invoved and personay invested in a project, and financia backing when requested. Financia support from potentia members is perhaps the best measure of support. For instance, are peope wiing at the start to contribute to finance a or part of a feasibiity study? Asking potentia members for an initia contribution can hep sort out those who are serious about the effort from those who are not. The second step in the events for starting a cooperative outined in Appendix A indicates that a steering committee of potentia members shoud be formed from a group for guiding the project. A steering committee represents the arger group and takes the major eadership roe in the project. Groups need peope who are eaders to assume contro of a project and to be part of the steering com- 5

11 mittee. An important prerequisite is that they be wiing to join the proposed cooperative and commit to financing it and using its services. Chosen or vounteered eaders must be peope that wi be active participants in the deveopment process as they wi utimatey be responsibe for making key decisions and potting the project's direction within the steering committee. The steering committee must aso ensure that a potentia members invoved fee free to voice their opinions and viewpoints about a project. Different perspectives are important considerations for deveoping a new business, and if aternative strategies or options are suggested and deemed important to evauate, they shoud be brought into pay during the feasibiity study process so they can be propery assessed. In USDA's Cooperative Service Report 54, Creating 'Co-op Fever': A Rura Deveoper's Guide to Creating Cooperatives (see references or author Bi Patrie mentions the foowing five characteristics of a project champion who provides strong eadership: 1. Credibiity 2. Financia stabiity 3. Basic knowedge of the industry 4. Wiingness to accept the servant eadership roe 5. A deveoper, not a promoter Patrie defines these five characteristics (verbatim) as foows: 1. Credibiity Is the individua personay credibe in his/her neighborhood? They need not be the biggest farmer or the most active in commodity associations, but they must be respected for their judgment. Avoid individuas who have tried every new idea that has come around and are suckers for anything new. I ook for peope who finish what they start and can take a ong-term view. 2. Financia Stabiity Is the individua capabe of keeping his/her house in order? Producers who have faied before (especiay if they have gone through persona bankruptcy) usuay ack the credibiity with other producers and enders to ead the project. They must be abe to devote time away from their persona business to hep deveop the cooperative. This criterion is extremey imiting because many producers ack the time it takes to do the work without jeopardizing their individua operations. I once worked with a cooperative whose interim board chair wanted to use organizationa funds to buy cothes. Her argument was that she woud make a better impression on investors if she coud afford to dress we. 3. Basic Knowedge of the Industry Is the individua famiiar with the industry in a comprehensive way? Most vaue-added cooperatives are aso verticay integrated. The project champion must have a basic understanding of the entire industry from the first steps of production through processing to marketing to the fina consumer. This is a ta order and can't be easiy fied. The "Madison Principes" 1 are critica at this stage of eadership seection. Often, producers become enamored of a manufacturing technoogy or an avaiabe buiding and want to quicky cose the dea to own the faciity or the equipment. A true project champion must ead the group through a market anaysis prior to anayzing processing faciity and equipment needs. If an individua can't be found who has this basic understanding of the industry, then I ook for a person who is wiing to earn. 4. Wiingness To Accept the Servant Leadership Roe The project champion is often uncompensated. They wi frequenty be criticized, often unfairy, and sometimes insuted. Thin-skinned or quick-tempered peope often do not ast in the pressure-cooker environment of creating a new cooperative enterprise. I ook for a project champion who has baance in her/his ife. They must have patience, peope skis, a good sense of humor, and a sense of what is ridicuous. 5. A Deveoper, Not a Promoter This is deveopment work, not promotion. Promotion may get coumn inches in the oca paper and a 30-second spot on the 6 o'cock news, but it won't buid a financiay viabe company. Whie enthusiasm is important, it can't repace critica common sense and soid business judgment. These five attributes are important in a project champion or eader of a cooperative deveopment project. Use of Advisors and Consutants Outside advisors and consutants can be usefu to a group during the business formation process. However, outsiders, no matter how we intentioned, shoud not be put into overa eadership positions. If they are, the process often becomes more top down 1 The Madison Principes are 12 principes for cooperative deveopment practitioners to foow. They were deveoped by the members of Cooperation Works! in Madison, Wisconsin, in See 6

12 directed rather than internay directed by prospective members, and in this case, potentia conficts may arise and the focus of the group's vision may be skewed. At the same time, a group shoud fee free to seek outside experienced consutants to hep guide it through the deveopment process, or perhaps to aid just a specific aspect of the process. For exampe, extension agents or enders that interact cosey with a group may be wiing to hep; accountants and awyers may provide assistance in specific areas such as bookkeeping, ega structure, and drawing up ega documents; and advisors, such as USDA cooperative deveopment speciaists or deveopment practitioners from a cooperative deveopment center, can hep the group with a or some aspects of the deveopment process, and may even provide direct technica assistance with feasibiity studies or business pans. Outside consutants are usefu because of their experience and expertise with the deveopment process and because they aso work in an objective manner to ensure that a potentia members' ideas, thoughts, and concerns are considered and that assumptions and information are accurate and reaistic. (See the Feasibiity Study Key Actions chapter for more information on choosing a consutant.) Step 4 Understand Sound Group Decisionmaking As stated above, strong and committed eaders are essentia for defining a project and deciding if a feasibiity study shoud be conducted. Informed eadership with enightened sef-interest and a commitment to group action is needed. Leaders must maintain a strong focus on the decisions to be made and be abe to create an environment where participants are encouraged to be active and invoved in discussions, creativity, and decision-making. For a project to succeed, a potentia members of a new cooperative business venture must be kept informed about project detais as they evove so that they buy into and fee committed to the project. To assist with decision-making, those on a steering committee shoud ask two questions: (1) If a bad decision is made, what woud be the cost? and (2) If no decision is made, what woud be the cost? If the cost of making a wrong decision is reativey sma, do not spend much time, money, or effort on the decisionmaking process. On the other hand, if the cost of committing an error coud be arge, it's better to put more resources into determining the pros and cons of the decision and defining a of the issues before choosing an option. In practice, this is not aways easy to impement given the different personaities invoved and the persona preferences for making decisions. Some may be sower to earn, need more time to contempate before making a decision, or have aversions to high risk. On the other hand, some members may want to go ahead and make a decision before reevant information has been gathered and fuy assessed. Baancing diverse aspects within a group can be difficut, but working to do so is paramount. Thus, decision-making often is one of the greatest initia chaenges that a group faces in deveoping a project. Figure 2 presents some guideines to assist groups with the decision-making process. Given the difficuty in making decisions, some groups or individuas try to avoid it. There is aways more information that can be gathered, but there is aso a cost to taking more time to deiberate. A decision must be made when further investigation costs more than new information is worth. Figure 2 Guideines for Group Decisions Unanimous agreement is not required to move forward; a consensus approach is better. Never decide to proceed based soey on negative reactions, such as resentment or envy toward middemen, enders, etc. A few reiabe persons are superior to a arger number of doubtfu persons. Base decision-making on economic and socia reaities faced by the cooperative. Make each decision ony once. Feasibiity Study Key Actions Once a steering committee and group have made the decision to proceed with a feasibiity study, there are a number of key actions that need to be taken. Figure 3 provides, in chronoogica order, the actions or decisions that have to be made. The key actions for a feasibiity study incude: deciding who wi conduct the study, deveopment of project assumptions, determining which components (study areas) wi be incuded to make the study comprehensive, accepting or rejecting the competed study, and group decisions after accepting the study. 7

13 Figure 3 Key Actions for Feasibiity Studies 1. Deciding who wi conduct the study. 2. Deveopment of project assumptions. 3. Determining components for a comprehensive study. 4. Accepting/rejecting the study. 5. Group decisions after accepting the study. 1. Deciding Who Wi Conduct the Study (Consutant Seection Criteria) Athough in principe it is possibe for a project group member to conduct the feasibiity study, normay, an outside consutant is hired to do it. Most prospective members and financiers view an objective evauation of a project concept via an outside practitioner as important. This objectivity often provides a group with hepfu information that might have been overooked by one who is participating directy in the project. Hiring a consutant to create a feasibiity study is an important decision, and thus the steering committee or group must use care when seecting that person (or firm). In practice, consutants have differing eves of abiity and usuay a consutant wi be strong on some points and weaker on others. The key is to seect a feasibiity practitioner who is skied in cooperative deveopment and versed in areas reevant to the type of project. Figure 4 provides possibe criteria to use for seecting a quaified consutant. The steering committee wi need to determine if a consutant is technicay proficient enough to undertake a feasibiity study and whether he or she has significant experience in doing so. The committee shoud review sampes of previousy prepared studies and speak with others for whom the person or firm has worked before contracting with them. It is important that a consutant have the traits required to work we within group situations. Figure 4 Criteria of a Good Feasibiity Study Consutant Has previous experience conducting feasibiity studies. Has experience with the industry to be stud ied, or access to experience and associated professionas. Works independenty and objectivey (e.g., of equipment manufacturers, marketers, etc.). Understands cooperatives fuy (their operations, governance, financia workings, etc.). Is wiing to isten to the groups' ideas. Works cosey with designated contact members of the steering committee or group. Is wiing to revise study given feedback. Accompishes the study within an agreed upon timeine. Works within the group's designated budget. Is a strong writer with skis in data anaysis and spreadsheet design and presentation. Provides cear, usefu information in the competed study. Consutants shoud have experience in the industry under study. Otherwise they may not correcty identify critica factors. Given business compexity, it is amost impossibe for one person to have experience in a areas. Some consuting firms resove this issue by having their feasibiity speciaist work with contracted industry experts. In any case, it is important to research many sources for a the pertinent information possibe about an industry. A team approach may, in some instances, be utiized to deveop a study. For exampe, a cooperative deveopment speciaist from the USDA or a practitioner from a cooperative deveopment center coud work jointy with industry speciaists to create a feasibiity study. The consutant shoud aso understand the unique aspects of cooperatives. Tax impications, distribution of net margins (profits), management, and other business considerations (e.g., governance) of cooperatives differ from those of other businesses and the nuances of each must be propery presented. The consutant shoud avoid preconceived notions about how the project wi function. The study shoud not be an "off-the-shef" document assembed from previousy created studies. Rather, the consutant shoud pay particuar attention to the ideas that the group has deveoped and craft a unique study suited to the group's needs. The consutant shoud work cosey with the group and be receptive to its suggestions. Aso, the consutant shoud be prepared to make technica revisions or to correct errors given group recommendations and wishes. Revisions are a norma part of the study deveopment process. Revisions shoud focus on the vaidity of the assumptions and the technica design of the study. Using an outside consutant brings objectivity to the feasibiity study rather than merey providing the resuts that the group wants. Consutants have a ega 8

14 obigation to provide a responsibe anaysis. They shoud not be asked to ater the resuts merey to conform to members' desires for a project's viabiity. Timeiness is an important consideration when seecting a consutant. Projects are time sensitive. Usuay, decisions to proceed await information provided in the feasibiity study. So care and diigence required for a we-crafted study must be baanced against the desire for speed. A quaified consutant must be abe to compete a we-designed study within a timeframe that serves the group's needs. On the other hand, the timeine must be reaistic. And, a consutant can ony progress as fast as a group makes the required decisions, provides information to the consutant, and carries out its other project responsibiities. Cost is an important factor. The expertise and skis that consutants offer a project must be weighed against their cost. A quicker timeine coud increase a consutant's fee. Preparing a pre-feasibiity anaysis may decrease the effort required to compete the feasibiity study and reduce the cost. Some pubic programs offered by the USDA's Rura Business-Cooperative Service, community deveopment offices, the Sma Business Administration, some cooperative deveopment centers, and oca business incubator programs provide technica assistance at itte or no cost to groups creating feasibiity studies. There are aso grant programs avaiabe such as USDA's Vaue-Added Producer Grants program, which can provide funding for a feasibiity study if a project meets the program's criteria and is seected. This program requires a one-to-one matching contribution from the appicant. A consutant shoud provide the data used to generate the financia tabes and scenarios reported in the feasibiity study and, preferaby, an eectronic spreadsheet format that can be easiy manipuated. Athough requesting this information can moderatey increase the cost of a feasibiity study, access to the actua data permits the group to use the information for ater needs with greater fexibiity. This data can aso reduce the cost of creating the business pan, if the group proceeds to that stage. Additionay, it can decrease the effort required for revisions, if in the future the group changes the project's assumptions to differ from those in the study. Once the consutant has been seected, the group shoud provide detaied instructions on the study requirements. There shoud be a egay binding contract between the parties. The group shoud consut ega counse for assistance. The contract shoud state ceary the requirements and roe of both the group and the consutant. It shoud have timeines, deivery dates, expicit deiverabes, and what is to be accompished before payment is made. Often, the consutant receives a downpayment before the feasibiity study has been conducted. The baance is paid ony after the study has been reviewed and accepted by the group (and possibe financiers if appropriate). This gives the group more everage to encourage timeiness or revisions. The contract shoud designate a third-party arbitrator to resove any disputed items. A compex, arge-scae project may require severa consutants to compete various aspects of the study. Mutipe consutants can reduce the group's dependency on a singe person or company. It aso can permit the group to seect experts from severa fieds. However, it aso can compicate the coordination and consistency of the information received. Before signing the contract, the group shoud discuss with the consutant arrangements for cost overruns, time deays, revisions, and what considerations wi be made for these issues. Changes after signing the contract can be costy or deay the study resuts. A parties shoud be cear about what to expect prior to signing the contract and initiating the study. (See Appendix C for a point-award system for seecting a consutant based on seect criteria.) Feasibiity Study Working Reationships A few quaified members of the steering committee (if the committee is a arge one), or the entire steering committee (if it is a sma one) shoud be designated to work cosey with the consutant or person deveoping the study. These group members must see that the feasibiity study propery presents and refects the right aspects of the project as it has been designed, and in accordance to the defined assumptions. Through this working reationship the study shoud be tracked through a of its stages and its ideas reviewed and carified. Steering committee members with appropriate backgrounds and the abiity to commit sufficient time to working with the consutant shoud be seected. These contact members represent the group's interests to the consutant. They are the contact to provide carification and additiona information that the consutant may require. Pus, they shoud provide periodic reports to the group about the study's progress. They aso shoud work with other group members and advisors to gather the information needed for the feasibiity study. These members are obiged to express the wishes of the entire group and not just their own views. 9

15 Members or outside financiers wi often perceive the reiabiity of the entire study based on its east accurate piece. An otherwise we-conducted feasibiity study coud be viewed as inaccurate or useess because of a simpe mistake. To prevent this, the feasibiity study shoud be carefuy examined for overa carity and ogica consistency is the anguage appropriate; is the document we organized; and can someone who is not famiiar with the project understand the study and its findings? Reviewers shoud confirm that the study's assumptions are ceary documented, we described, justified, and as accurate as possibe. Athough the contact members take the ead in working with the consutant, others shoud review the study carefuy before the group decides to accept it. Advisors such as USDA cooperative deveopment speciaists or Extension agents can provide an objective review and offer insights on content or study assumptions. This outside review can be especiay usefu when the group has used consutants to prepare the report. Often, a series of draft reports are presented to the group as the study proceeds. Issues identified that warrant changes to the study are then conveyed to the consutant. 2. Deveopment of Project Assumptions Key project assumptions shoud be determined at the initiation of a feasibiity study. Usuay an assumption is thought of as something that is taken for granted, but in the current context assumptions provide the basis for the project and therefore need to be carefuy thought out and deveoped. Since the group cannot anayze every variation of a project, it must provide boundaries within which the study wi be carried out. The consutant, if one is being used, can assist in the deveopment of assumptions by providing objective knowedge and expertise. He/she shoud aso ask the group difficut questions to narrow the range of assumptions and make sure they are as accurate as possibe, as we as justifiabe. Figure 5 provides four questions and some carifying statements that a steering committee or group shoud address as it deveops assumptions for the feasibiity study. The steering committee or group may not be abe to provide a of the required detai for each of the assumptions that need to be deveoped, so again, using an experienced practitioner/consutant to hep research and deveop some of the assumptions may be necessary. Furthermore, some of the assumptions wi have more than one option to study. That's where sensitivity anaysis wi come into pay. Other questions that hep determine proper assumptions might arise as we, depending on the type of project. It is up to the steering committee and those conducting the study to expore a avenues when determining the assumptions needed for a fu anaysis in a study. Considering more than one potentia business structure and/or aternative business process is not a probem at this stage. However, it is important that an anaysis be conducted in the feasibiity study for each identified project scenario so that the steering committee or group can assess them. 3. Determining Components of the Feasibiity Study Report A comprehensive feasibiity study wi contain a the ingredients necessary for the steering committee and group to make a sound decision on whether to proceed with a project. Athough studies vary depending on the type and scope of the proposed business, a reports must contain enough eements to present a comprehensive view of the project. Whie some specific project detais may be undecided, such as pant ocation or who the manager wi be, a report must contain enough information and anayses to determine a project's potentia for success or faiure. The feasibiity study report serves as the written representation of the group and its potentia cooperative business. Potentia members, financiers, and others wi use this document to hep determine their eve of support for the project. The report's appearance as we as its content can infuence peope's perception of it. Thus, the ayout shoud be professiona, we organized, and we written. The appearance of and specific aspects incuded in the report wi vary depending on the project, the group, and the consutant who prepares the study. Thus, there is no required ength or number of components for a study report, but the study must provide an organized format with enough critica information and anayses pertinent to the project to hep the group make an insightfu decision. 2 Key eements wi change depending on the nature of each project. As a rue of thumb, if reasonabe changes in a factor coud make the project change from successfu to unsuccessfu, it is a key eement. 2 Appendix D provides the USDA Rura Deveopment summary guide for what a feasibiity study shoud contain for a business appying for USDA Business and Industry guaranteed oans (note that the criteria in the guide can be incorporated into a feasibiity study). 10

16 Figure 5 Questions for Deveoping Assumptions 1. How/why is the proposed cooperative needed (as determined by the potentia members)? Define the assumed products and/or services to be handed or provided (there can be more than one and each shoud be ceary defined). Expain the proposed cooperative's comparative advantage (e.g., define what the market is demanding and what producers do we). Describe the proposed cooperative's benefit to members (e.g., enhanced marketing, higher marketing prices, ower prices for products purchased, more efficient and ower cost services, etc.). 2. What is the potentia membership base and voume of product for the project? (This data is normay gathered via a survey of potentia members.) Define the eve of potentia support by producers who woud have the opportunity to participate. Describe the approximate number and size of the producers who are ikey wiing to participate. Define the potentia voume of products or services. Expain the potentia for future expansion of membership and voume. 3. How we wi the cooperative fit into the market? Define the projected prices for both inputs and outputs. Define the projected voume of saes. Expain the size of the market and how the cooperative fits in (e.g., market share). Determine the potentia for strategic aiances. 4. What are the financia and organizationa needs for the project? Estimate overa capita needs and describe potentia sources of this capita. Define the eve of financing needed and potentia enders. Describe the ega requirements, documents or agreements, permits, and inspections. Describe the faciities and equipment needed and whether they wi be purchased, buit, or eased, and estimate how much they wi cost. Estimate the management requirements and skis, and the cost of obtaining the appropriate management. Exampes coud be the technoogy of production, voume of inputs, the market for goods sod, marketing channe, personne costs, prices paid, and capita costs. Figure 6 provides a genera exampe outine of the major components a feasibiity study might contain. This exampe incudes eight major components, but the exact number and order of components for different studies coud very we vary from these. In addition to the potentia items isted in the outine beow or others determined given the project, a study shoud incude a tite page, the name of the person(s)/firm who conducted the study, and a tabe of contents. Genera descriptions of each of the sampe components incuded in Figure 6 are described in the foowing sections (sections incude reevant outine items). Executive Summary I. Executive Summary A. Summary of the Important Findings and Recommendations It is important to have a concise summary of the critica segments of the report in an executive summary at the front of the report. This wi aow reviewers to gain a strong sense of the report's significant information and major findings before they proceed with reading the entire study. Each major part of the report shoud be briefy and ceary summarized. When appicabe to the major findings and fina concusions, significant data refecting concrete anaysis shoud be provided, and a summary of the key recommendations isted. This segment of the report shoud provide a context from which the reader wi be abe to better decipher a the components and findings of the report. As a means of setting the foundation for the study, it is important to aso identify the steps competed for the project up to the current point in time, and the names of those heaviy invoved (the steering committee members at east). 11

17 Figure 6 Exampe Outine of Feasibiity Study Report Components I. Executive Summary A. Summary of the Important Findings and Recommendations II. Introduction Project Description and Justification A. Description of the project B. Genera setting and need for project C. Work aready competed, pertinent dates, and those invoved in the project III. Industry Background A. Basic background information on the industry B. Economic conditions of the industry C. Impications and feasibiity of entering industry IV. Marketing A. Market potentia for goods or services to be handed B. Markets to be served (current and future) and their attributes C. Ease or imitations of entering the market D. Marketing pan (strategies to be foowed, summary of key actions) E. Overa assessment of the marketing situation and pan V. Operationa and Technica Characteristics A. Suppy of abor and its quaity (incuding management) B. Suppy of key inputs needed for operations B. Technica characteristics and specifications of required pant and equipment C. Assessment of potentia operationa capacity and efficiency D. Location considerations (if one has not been aready seected) and assessment (if one has been seected) VI. Financia Statements and Projections (pro forma statements) A. Projected revenues, operating costs, and net income B. Capita requirements, potentia and actua sources of equity, accumuation schedue, investment schedue (pant, equipment, human resources, etc.) C. Pro forma cash fow statement D. Income, baance sheet, and sources and uses of funds statements E. Equity accumuation pan and financia ratio anaysis F. Financia pan summary (description of how it wi a fit together) VII. Summary and Recommendations A. Concise Summarization of the Major Findings B. Recommendations and Concuding Comments C. Deveopment schedue (remaining key steps and accompanying dates for action) VIII. Appendix A. Appendices (additiona spreadsheets) B. Important suppementa information C. Notes, credentias, and references Introduction II. Introduction Project Description and Justification A. Description of the project B. Genera setting and need for project C. Work aready competed, pertinent dates, and those invoved in the project This section is usuay somewhat brief and simpy introduces the cooperative project and provides some justification for its need. Information as to when the project process began and in what stage it is now shoud be offered. In genera, size and scope of the project, membership aspects, methodoogy empoyed for data coection, marketing and economic conditions, competition, reevant technica factors, economic and community conditions, etc., can a be briefy 12

18 introduced to provide the reviewer/reader with an overa genera conception of what the cooperative project entais. Industry Background III. Industry Background A. Basic background information on the industry B. Economic conditions of the industry C. Impications and feasibiity of entering industry The state and status of the industry within which the cooperative wi operate shoud be described in as much detai as possibe and be broken down into geographic appicabiity (i.e., foreign, domestic, regiona, oca) to the project. The study shoud incude charts and graphs of industry trends (e.g., voume, prices, byproducts, etc.), as we as a compete assessment of the competitive environment to propery define the need or fit of the cooperative within the industry sector. Pertinent data from industry organizations is hepfu if it can be acquired. Government reguations and poicies within the industry in question shoud be feshed out and their reevance to the proposed business expained. Any reguations that might need to be met (e.g., environmenta impact assessments, permits, etc.) shoud be carified and anayzed. Costs associated with the government reguations and poicies of an industry wi need to be documented for the financia projections section. Marketing IV. Marketing A. Market potentia for goods to be handed or services to be provided B. Markets to be served (current and future) and their attributes C. Ease or imitations of entering the market D. Marketing pan (strategies to be foowed, associated costs, summary of key actions) E. Overa assessment of the marketing situation and pan Various components of the project's proposed marketing pan, whether for products to be marketed or goods to be sod, need to described and anayzed. The marketing environment shoud be fuy described. The description shoud incude how the product or products wi be introduced and channeed into avaiabe markets. A description of potentia customers, processors, handers, etc. shoud aso be provided. Procurement and saes strategies for commodities or goods to be purchased and/or sod shoud be described. This section shoud address market demand impications, marketing costs, transportation issues, coordination with others in the market chain (e.g., brokers, venders, manufacturers, processors, pooing, etc.), the quaity and form of the products to be marketed, and an overa strategic assessment of marketing the product or products. When appicabe, information from market outook reports (e.g., USDA and other government agencies) that provide forecasts on specific crops, products, and industries are hepfu for providing a context for the marketing pan. Reevant charts, graphs, and tabes shoud be provided to present a cear picture of the marketing environment. If it's a vaue-added venture, the impications of marketing the resuting products shoud be defined. How those products fit into existing markets given competitors' simiar products shoud be researched and reported. From the overa marketing anaysis, an assessment of the feasibiity of the proposed marketing pan shoud be incuded. Operationa and Technica Characteristics V. Operationa and Technica Characteristics A. Suppy of abor and its quaity (incuding management) B. Suppy and costs of key inputs needed for operations C. Technica characteristics and specifications of required pant and equipment D. Assessment of potentia operationa capacity and efficiency E. Location considerations (if one has not been aready seected) and assessment (if one has been seected) This section ays out the operationa aspects and procedures of the proposed business incuding: the suppy of abor and its quaity; which key inputs wi be required (raw materias such as soybeans or wheat, for exampe), their source (supported by a survey of potentia members, if appicabe) and their cost; the technica characteristics (e.g., the type of pant design required, equipment, faciities, buiding systems, etc.); the feasibiity of finding proper management; ocation aspects; and operationa issues or options; etc. The 13

19 study shoud address the abiity of the project to operate efficienty within the scope of the project's parameters. It is important to provide information on the technica aspects of the project and to show how the proposed technoogies wi work within the context of the entire project. In projects with unproven technoogies, this can be the most important aspect of a study and it provides a basis for cose assessment. In projects with proven technoogies, the study can serve to correct design faws before costy mistakes are impemented. If the project requires construction of a sophisticated faciity, such as a meatpacking or soybean processing pant, professionas such as architectura, engineering, or management speciaists wi need to be consuted eary in the process. The needed expertise shoud be described in the feasibiity study. Assistance that wi be needed for oan agreements, ega contracts, and construction shoud be documented aso. If a ocation has been seected, the study shoud address the impications of that ocation is it efficienty situated for the potentia abor suppy, is it adequate for deivery and distribution channes, does it meet city/town ordinances and reguations, wi permits be required, resources be avaiabe to cover its costs, etc.? If a ocation has not been seected, the feasibiity study may provide some prerequisite stipuations, data, and standards by which to choose a ocation given the type of project, industry, and technoogy invoved. Financia Statements and Projections VI. Financia Statements and Projections (pro forma statements) A. Projected revenues, operating costs, and net income B. Capita requirements, potentia and actua sources of equity, equity accumuation schedue, investment schedue (and, pant, equipment, human resources, etc.) C. Pro forma cash fow statement D. Income, baance sheet, and sources and uses of funds statements E. Equity accumuation pan and financia ratio anaysis F. Financia pan summary (description of how it wi a fit together) Possibe economic outcomes are a prominent part of a feasibiity study and are critica in the overa assessment of a project. Therefore, it is extremey important to do a thorough and carefu job with the financias. Financia projections are usuay made for 3 years. Cash fow statements shoud be monthy, whie income statements and baance sheets shoud be monthy or quartery for the first year and then annua for the second and third years. Financia statements and projections stem from vaid and objective assumptions. Financia assumptions, such as capita requirements, equity needs, prices, human resources needed, and other factors, wi come into pay here. Because the economics of the project are so important to project assessment, assumptions must be in ine with the reaity of the situation and shoud not be overy optimistic or simpistic. Assumptions such as price forecasts/projections shoud be based on soid facts, such as historica prices and changes that have occurred in the industry which may affect the outook. The sources for the facts and the rationae for key assumptions shoud be we documented either in the report body or in an appendix. Most feasibiity studies begin with pro forma cash fow statements based on the assumptions and other data coected about the project, such as equity coected, product voume, purchases, saes, and expenses, for exampe. Besides equity, revenue streams and operating costs, the pro forma statements must incude repayment and interest on potentia short-term and ong-term debt and/or other investments in the project. The cash fow statements (usuay done on a monthy basis) must ceary show when capita is introduced and when it is repaid. This is important for indicating the project's repayment capacity, a critica consideration for a ender or investor. For a sampe pro forma cash fow statement, see Appendix E. Aso incuded in this section are income statements, baance sheets, and sources and uses of funds statements (or statements of cash fows). These pro forma statements provide important information beyond the cash fow anaysis. The pan for accumuating needed member equity adds even more information by providing dates, sources, and amounts of equity expected (this information wi be ikey obtained from a potentia member survey). Another usefu anaysis to incude is a ratio anaysis where ratios are deveoped from the pro forma statements. For exampe, current ratios, debt ratios, assets turnover, return on net worth, return on investment, return on saes, etc., shoud be formuated and compared during the projected years. For sampe pro forma operating, baance sheet, and ratio statements, see Appendices F, G, and H, respectivey. 14

20 In the financia anaysis, the study shoud show the impact of varying key project assumptions. This controed variation, caed sensitivity anaysis, permits panners to view which project eements are the most susceptibe to positive and negative changes. For exampe, what impact does a 10-percent reduction in saes voume have on net margins? The sensitivity anayses conducted shoud then be studied, and those that are potentiay reaistic shoud be deveoped into specific scenarios, which woud invove ooking at a aspects of how the proposed possibe changes woud affect the project. Both "worst-case" possibiities and optimistic scenarios shoud be created for comparison purposes. A comparison tabe and discussion shoud be deveoped so that it's easy to assess the differences between scenarios. The financia section shoud summarize a the findings of the financia anayses and provide an overa assessment of the financia and economic impications of the project. The financia impacts at both the cooperative and member eve shoud be detaied. Summary and Recommendations VII. Summary and Recommendations A. Concise Summarization of the Major Findings B. Recommendations and Concuding Comments C. Deveopment schedue (remaining key steps and accompanying dates for action) To finaize the study, the ast section of text shoud summarize a of the major points that the information and anayses throughout the report provided. This wi aow the reader to fuy comprehend a the different pieces of the study and how they work in conjunction with each other. The project's impact on potentia members shoud be addressed. Project benefits, for exampe projected payment to members for product deivered to the cooperative, and patronage refunds shoud be summarized. Potentia members shoud gain an understanding of the benefits the proposed cooperative woud provide them and be abe to use that information to decide whether to join. The section shoud ceary describe any important factors that the steering committee needs to consider as it works toward impementing a fu assessment of the business and making a decision on whether to proceed. Some other aspects of the study that might be covered in the summary incude any possibe project risks for potentia members or other investors, potentia ega and governmenta setbacks that coud come into pay, and time-critica factors, among others. If the study shows that the project is ceary feasibe, this section shoud describe any important work that sti needs to be done and actions that need to be taken (with reevant dates) as the group works toward a soid business pan and impementation. If the study found that more information, resources, etc. are needed before the project wi be feasibe, it shoud ceary state such discrepancies and provide recommendations for potentia actions that coud aeviate the issues. Appendix VIII. Appendix A. Appendices (additiona spreadsheets) B. Important suppementa information C. Notes, credentias, and references The appendix of the report shoud incude suppementa tabes, spreadsheets, charts, and information that are reated to the anaysis and descriptions in the report's body that wi provide the reviewer with a greater understanding of the project. Some exampes of suppementa information, which wi be highy dependent on the type of business being studied, might incude: Background information on assumptions used in the anaysis if not fuy described in the body of the study (some might be derived from potentia spreadsheet data given as exampes here). Monthy inventory tracking spreadsheets for commodities to be handed, purchased,processed, sod etc. Monthy saes price spreadsheets for commodities to be handed, purchased, processed, sod, etc. Capita purchase and depreciation schedues for and, buidings, equipment, parts, etc. Empoyee schedues and saary/wage information for any staff that wi be hired (management, saes representatives, administrative staff, warehouse personne, aborers, etc.). Debt repayment schedues for different categories of borrowing (rea estate, equipment, working capita, etc.). Pro forma financia statements (cash fow, operating, baance sheet, etc,) for different scenarios studied, but that weren't a major focus in the body of the report. 15