United States Department of Agriculture Rural Business Cooperative Service RBS Service Report 58

Cooperative Feasibility Study Guide

Preface

This guide has been designed to assist agricultural cooperatives in completing a feasib l t s u y. Rather than being a complete handbook, this publication presents the iiy td important elements to consider when conducting a feasibility study. The guide contains information on whether or not a group should conduct a feasibility study, the steps involved, how to evaluate a study, and how to implement one once completed. Tips on selecting and working with consultants are also provided. A sample feasibility study outline is included for reference. October 2000 Price: domestic $5.00; foreign--$5.50

Contents

The project development process .........................................1 Why do feasibility studies? ..............................................2 What is a feasibility study? ..............................................2 Feasibility study limitations ..............................................3 Creating a feasibility study ...............................................3 Project den t o ..................................................3 iin Group characteristics ..............................................4 Group decisions ..................................................4 Feasibility study decisions ..........................................5 1. Conduct the study? ..............................................5 2. Idea identication and clarication ..................................5 3. Study assumptions ..............................................5 4. Who conducts the study? .........................................6 5. How to review the study ..........................................8 6. Accepting the completed study .....................................8 7. Implementing an accepted study ...................................8 Feasibility study report ..................................................9 Bankers considerations ................................................10 Implementing a project .................................................11 Background information sources .........................................12 Appendices Appendix A: The feasibility study vs. the business plan ..................12 Appendix B: Sample feasibility consultant selection criteria ...............13 Appendix C: Sample feasibility study outline ...........................13 Appendix D: Considerations for implementing feasibility studies ............15

Contents

Figures Figure 1: The project cycle ..........................................1 Figure 2: The project cycle described .................................2 Figure 3: Guidelines for group decisions ...............................5 Figure 4: Decisions for feasibility studies ...............................5 Figure 5: Feasibility study assumptions ................................6 Figure 6: Criteria for selecting a good feasibility study consultant ............7 Figure 7: Bankers' considerations for feasibility studies ..................11

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i v

Cooperative Feasibility Study Guide

James Matson Cooperative Development Specialist

The Project Development Process

The feasibility study is an integral part in developing a business project. Whether its for the creation of a new cooperative or the expansion of an existing one, the pro e t c c e i s m l r. In "How to Start a jc yl s iia Cooperative"(RBS CIR 7), Galen Rapp and Gerald Ely present a 16-step sequence of events recommended for c reating an agricultural cooperative. This guide is an expansion of the seventh step, now to conduct the feasibility study. For purposes of cooperative development, the components in this cycle can be divided into five basic stages (figure 1 . F g re 2 summarizes activities that ) iu occur in each phase of the cycle.

Differing amounts of time may be required for each stage in the project cycle, depending on the particulars of the project and the group involved. Typically, it takes 2 years or even more for a cooperative pro e t jc to move from preliminary planning to project executo. in Key aspects of the project cycle seem to recur during the development process. The information obtained in the evaluation stage provides the impetus for the idea pursued in the next round of planning. This cycle is a series of ever-improving estimates as to how the project will function. Each cycle provides more information. When evaluated and applied to the succeeding phase, ways to accomplish the project come into sharper focus.

Figure 1The

Project Cycle

Figure 2The

Project Cycle Described

I e t c t o : dni ain Deliberation: Implementation: Execution: Evaluation:

preliminary idea creation, planning, and pre-feasibility studies to rene ideas. ormalization of group, conducting feasibility studies, and decision to proceed. securing capital, construction, obtaining permits, and hiring management. mobilization of manpower, equipment, and materials to carry out the plan. determine what did and did not work (to plan again).

One stage of the project cycle is deliberation. Planners focus should be on whether to proceed with the project. The feasibility study should be conducted during this stage, before t e g h roup decides to implement or terminate the project. Planners need to know t e requirements for a successful pro e t T e f a i i ih jc. h esbl ty study serves as an important tool for the group's deliberations.

Why Prepare Feasibility Studies?

Developing any new business venture i d ff c l . s i iut Taking a pro e t f j c rom the initial idea through the operational stage is a complex and time-consuming eff r . ot Most ideas, whether from a cooperative or an investorowned business, do not develop into business operations. If these ideas make it to the operational stage, most fail within the first 6 months. Before the potential members invest in a proposed business pro e t t e jc, hy must determine if it can be economically viable and then decide if investment advantages outweigh the risks involved. Many cooperative business pro e t a quite j c s re expensive to conduct. The projects involve operations t a d ff r f h t i e rom those of the members individual business. Often, cooperative businesses operations involve risks with which the members are unfamiliar. The study allows groups to preview potential project outcomes and to decide if they should continue. Although the costs of conducting a study may seem high, they a relatively minor when compared with the total re project cost. The small initial expenditure o a f a i i n e s b lity study can help to pro e t l rger capital investments tc a l t r. ae Feasibility studies are useful and valid for many kinds of projects. Evaluation of a new business vent re b t f u , o h rom new groups and established businesses, is the most common, but not the only usage. Studies can help groups decide to expand existing services, build or remodel facilities, change methods of operation, add new products, or even merge with

another business. A feasibility study assists decisionmakers whenever they need to consider alternative development opportunities. Feasibility studies permit planners to outline their ideas on paper before implementing them. This can reveal errors in project design before their implementation negatively aff c s t e p e t h roject. Applying the lessons gained from a feasibility study can significantly lower the pro e t c s s jc ot. The study presents the risks and returns associated with the project so the prospective members can evaluate them. There is no "magic number" or corre t c r t o return a project needs to obtain before a g ae f roup decides to proceed. The acceptable level of return and appropriate risk rate will vary for individual members depending on their personal situation. Cooperatives serve the needs and enhance the economic returns of their members, and not outside investors, so the appropriate economic rate of return for a cooperative project may be lower than those r equired by projects of investor-owned firms. Potential members should evaluate the returns of a cooperative project to see how it would aff c t e re u n o a l o et h trs f l f their business operations. The proposed project usually requires both risk cptlf a i a rom members and debt capital from banks and other financiers to become operational. Lenders typic l y require an objective evaluation of a project prior al to investing. A feasibility study conducted by someone without a vested intere t i t e p s n h roject outcome can provide this assessment.

What Is a Feasibility Study?

This analytical tool used during the project planning process shows how a business would operate under a set of assumptions the technology used (the facilities, equipment, production process, etc.) and the financial aspects (capital needs, volume, cost of goods, wages etc.). The study is the first time in a pro e t jc development process that the pieces are assembled to see if they perform together to create a technical and

economically feasible concept. The study also shows the sensitivity of the business to changes in these basic assumptions. Feasibility studies contain standard technical and financial components, as discussed in more d t i l t r eal ae i t i report. The exact appearance of each study n hs varies. This depends on the industry studied, the critical factors for that project, the methods chosen to conduct the study, and the budget. Emphasis can be placed on various sections of an individual feasibility study depending upon the needs of the group for whom the study was prepared. Most studies have multiple potential uses, so they must be designed to serve everyones needs. The feasibility study evaluates the pro e t s jc potential for success. The perceived objectivity of the evaluation is an important factor in the cre i i i y dblt placed on the study by potential investors and financiers. Also, the creation of the study require a s srong background both in the financial and technical t aspects of the pro e t F r t e e reasons, outside conjc. o hs sultants conduct most studies. Feasibility studies for a cooperative are similar to those for other businesses, with one exception. Cooperative members use it to be successful in enhancing their personal businesses, so a study conducted for a cooperative must address how the pro e t jc will impact members as individuals in addition to how i wl a t i l ffect the cooperative as a whole.

A study is not intended to identify new ideas or concepts for a project. These ideas should be clearly identified before a study is initiated. The group needs to accomplish a number of steps before a f a i i i y esblt study is instituted. The closer the assumptions lie to te" h real world," the more value a study will hold for the group. A study should not be conducted as a foru m merely to support a desire that the project will be successful. Rather, it should be an objective evaluation of the project's chance for success. Studies with both positive and negative conclusions can assist a groups decisos in. Financiers may require a feasibility study before providing loans, but this should not be the studys only purpose. It should enhance a banker's ability to evaluate a project. The primary goal should be to aid the group's decisions, not to secure financing. A study will not determine if it is advisable to iiit ap n t a e roject. The potential members have to decide if the economic returns justify the risks involved in their continuing the project. The study r esults should assist them. A study analyzes basic project assumptions, shows how results vary when assumptions change, and provides guidance as to critical elements of a project. Conducting a study should provide the group with project-specific information and assist it in making decisions. This should lower the risks in continuing a pro e t jc.

Feasibility Study Limitations

Although the feasibility study is a useful tool for project deliberation, it has limitations. There a severre al purposes for which a study cannot or should not be applied. A study should be conducted to evaluate specific projects. Simulations or projection models, although useful, do not replace a specific feasibility study of a project. The study should not only consist of generic market information but also should be tailored for the specific pro e t jc. A feasibility study is not an academic or research paper. A completed study should permit a group to make better decisions about the strategic issues of its specific project. The study is not a business plan that is developed later in the project development process and functions as a blueprint for the groups business operations (Appendix A). The plan presents the g roup's intended responses to the critical issues raised in the study. T e results form the basis for developing h a business plan.

Creating a Feasibility Study

The creation of a feasibility study, although part of the project cycle, contains a pro e s i i s l . A l cs n tef l studies have four key factors: project definition, group characteristics, group decisions, and feasibility study decisions.

Project DenitionIn a successful cooperative

pro e t a c re g j c , o roup of people must feel the need to work together to solve a problem or take advantage of a business opportunity. Improving the situation as a g roup provides the context for a cooperative business project. This project must be understood. The group must believe it can achieve the goal. Often, a few individuals provide the spark for the idea, but group interaction permits them to hone its idea and develop s ff c e t i t rest. In addition, the group discovers u iin ne common interests that can make a cooperative an e etv o ff c i e rganization. The initial ideas of the group must have coalesced into a clearly stated pro e t b f re a f a i i i y jc, eo esblt

study can be conducted. The ideas also must have been developed to the stage where hoped-for goals can be quantified. Cooperatives work best when participants see a mutual benefit from working jointly rather than acting alone to achieve a goal. Members voluntarily choose to belong to a cooperative because they see some potential benefit. When a project can be addressed jointly and potential member interest exists, then a cooperative can be the solution. A study is not needed unless there i a s e i i p s p c f c roject. This project must be: a defined, understood, described, and quanti. fe; id b significant, broad, and large enough to war. rant group action; c capable of a solution for purely economic and . technical reasons. d economically, c l u a l a d s c a l f t i g . u t r l y, n o i l y i t n for the group; and e considere a reasonable solution by group . d members. When all these elements exist in a pro e t i e , a jc da successful cooperative can be developed. If any are lacking, the concept must be revised before p roceeding with the pro e t jc.

ideas or with strategic planning and organization. Advisors such as USDA cooperative development specialists can guide the group through the development process. They can also help to assure that all the members ideas are considere . d Outside advisors, while useful to the group, should not drive the process. The project should be developed for the group's benefit. Leadership should come from within the group and it should make the final decisions on the pro e t s d rection. Outsiders, no jc' i matter how well intentioned, should not fill this ro e l.

Group DecisionsS rong leadership is essential for t

defining the project and deciding if a feasibility study should be conducted. Outside assistance can be useful, but the projects vision and direction should come f rom the group. Informed leadership with enlightened sl-ne e f i t rest and a commitment to group action is needed. Leaders must maintain suff c e t c i i n reative sress to bring all parties to a decision about t continuing with a feasibility study. S rong leadership is necessary, b t f r a p j c t t u o ro e t o succeed, all potential members of a new cooperative business venture must be informed so they feel committed to the project. One or a few aggressive individuals may cut short the deliberation process and forc a e premature decision. To prevent this, the group should form a steering committee of the most active members to guide the project development process. This committee should keep the group informed on the pro e t s jc progre s s. Decision-makers should take a simple test that provides a good guideline: (1.) If I choose an action and my decision proves to be wrong, what would be the cost? and (2.) If I make no decision, what would it cost? If the cost of making a wrong decision is re a i eltv ly small, do not spend much time, money, o e r ffort on the decision-making process. On the other hand, if the cost of committing an error could be larg , i b t e t e ts etr o put more emphasis on determining the pros and cons before choosing. In practice, that is not easy to implement, especially with groups where each member has an individual personality and decision-making method. Some may be slower to learn, need time to contemplate before taking a decision, have aversions to high risk, or believe that time and money spent to research a pro e t jc a a waste. Some members may want to decide before re r elevant information has arrived. Balancing these diverse sentiments within a group can be diff c l . iut Decision-making often is one of the gre t s i iaet n tial challenges that a group faces in developing a pro-

Group CharacteristicsFor any cooperative project to be a success it must be large enough to achieve a "critical mass." That number depends on the product, scope, and economic resources available. Sufficient support is critical for developing a cooperative project. A smaller number of individuals who are fully committed to a project can have a higher chance of success than a larger number who are only partially committed. Attendance at organizational meetings, survey r esults expressing support, and willingness to work to develop the pro e t a needed to demonstrate supj c re port. Financial backing of members is perhaps the best method that a group has to express that support. A feasibility study seeks to determine the number of members or product volume required for the pro e t t jc o succeed. Advisors and consultants can be useful to a g roup during its formation. This assistance may come f rom outsiders such as Extension agents or lenders who interact closely with the group. This assistance may be in a specific area such as bookkeeping or legal sructure with the help provided by accountants and t lawyers. The group may seek outside help to focus its

Figure 3

Guidelines for Group Decisions

Unanimous agreement is not required to move forward . G Never decide to proceed based solely on negat v reactions, such as resentment or envy ie toward middlemen, lenders, etc. G A few reliable persons are superior to a larger number of doubtful persons. G Avoid promises of what the cooperative can do. G Base expectations on economic and social re l a ities faced by the cooperative. G Make each decision only once.

Conduct the Study? Often groups proceed directly to the feasibility study and overlook the importance in making this first decision with deliberation. Take the time to determine if a feasibility study is appropriate. Moreover, if this decision is conducted thoughtfully, the group will probably have established a procedure for decision-making. Then, the decisions that the g roup needs to make later in the development process will probably come easier and the likelihood of being correct will be greater. Carefully consider whether to conduct a feasibility study will save much time and money and increase the study value once completed. No group has unlimi e resources. The study is a critical tool in pro e t td jc development, so money spent on it reduces the amount available for project development areas. The study should return the maximum benefit to the group for the money invested. Idea Identication and ClaricationPrior to
initiating a feasibility study, t e g h roup needs to sketch out possible design of the project. This can begin with the "back of the envelope" calculations and proceed t rough a formal pre-feasibility study for complex h projects. Begin by accumulating information needed to focus the direction of the pro e t jc. In many cases, more than one idea has been suggested as potential projects. Some concepts may be impractical or appear good on the surface but are not possible when further studied. Some may require more explanation. Delve into the proposed ideas to extract the most advantageous elements of each. Typically, t e h most successful projects combine the best aspects of many diffrent ideas into one clearly defined pro e t e jc. This initial elaboration provides a framework to develop the pro e t I i d c t o s a positive, this framej c . f n i a i n re work can be expanded with a comprehensive feasibility study. The steering committee and internal decisionmakers normally perform this task. Gathering the needed information for this preliminary evaluation begins with identifying an idea. The group and possibly its advisors work together to gather preliminary information. It can be discussed informally or presented in a formal document. In either case, the information gathered will be needed later if the group proceeds with a feasibility study.

Figure 4Decisions

for Feasibility Studies

Conduct the study? G Idea identification and clarification. G Study assumptions. G Who conducts the study? G How to review the study. G Accepting the completed study. G Implementing an accepted study.
G

j c . F g re 3 p et iu resents some guidelines to assist groups with the process. The ideas can help to create a system for making decisions. This should permit positive progress in the development of the pro e t jc. Given the difficulty in making decisions, some g roups or individuals try to avoid it. This tactic is not r ecommended. Not making or postponing a decision a decisions in themselves. There is always more re information that can be gathered, but there i a s a s lo cost to taking more time to deliberate. A decision must be made when further investigation costs more than new information is worth.

Feasibility Study DecisionsThere a moments re

when the group has to make key decisions. Taking the time to think through each of these decisions can ic n rease the value of a feasibility study. Decisions listed in Figure 4 have a logical flow and are p resented i c ronological order discussed in the following n h sections.

Study AssumptionsKey project assumptions should be determined prior to initiating a feasibility study. It cannot analyze every variation of a pro e t s jc, o the group must provide study boundaries. At a

Figure 5Feasibility

Study Assumptions

Is the project needed? G What is the product or service? What is the essence of the project? (There can be more than one. Each should be clearly dened.) G What is the group's comparative advantage? What is the market demanding and what do producers do well? G How will the project benet the members? G Have the potential members determined the need or are others promoting it? What is the potential membership base and volume of product for the project? (This is normally supported with a member survey.) G What is the support by producers, community, and potential lenders? G What is the number and size of producers who are willing to participate? G What volume of product will be included in the project? G What future expansion of both membership and volume is possible? What is the competitive outlook? G What will prices be for both inputs and outputs? G What is the anticipated volume of sales? G What is the size of the market? G Who are the major competitors? What are their market shares, facilities, and business structures? G Will the group use strategic alliances to accomplish its goals? What are the organizational needs for the project? G What are the capital needs and possible sources of this capital? How much money is needed? G What are the budgeting and nancial needs? What are possible sources for nancing? G What are the legal requirements? What documents or agreements are needed? What permits and inspections will the project require? G What facilities are needed? Will the group purchase, build, or lease the facilities? G What are management requirements? What skills will the cooperative require of a management team? What will this management cost? Can producers pay enough to attract good personnel?

minimum, the group should be able to provide general answers to the four questions presented in Figure5 . Examples of the type of information where t e g h roup may already have information or need to make assumptions are included. Obviously, t e g h roup might not know the exact dtiso alp e a l f l roject aspects. Several options may seem possible so the group must gather more information that permits it to decide among them. Considering more than one possible structure i n t a p s o roblem at this stage. However, t e g h roup should strive to answer the four questions for each possible project scenario. The feasibility study can help the group to reach a decision between project options or to see economic outcomes from diffrent situations. The more focused e the project design before implementing a feasibility study, the more likely the study will be of use.

feasibility study, outsider consultants produce most. Prospective members and financiers see the objective evaluation of a project concept with a feasibility study as an important aspect of the study. This objectivity can provide a group with helpful information that might have been overlooked by those participating d rectly in the pro e t i jc. Hiring a consultant to create the study can be the most important decision in the creation of the study. A g roup should use a good consultant for the pro e t jc. Figure 6 p rovides possible criteria for selecting a good consultant. A group should determine if a consultant is technically qualified to create a feasibility study.I n addition, a consultant must have the demeanor to work well with a particular group. (See Appendix B for a sample of a consultant selection guide.) Does the consultant have an adequate backg round to prepare the study? The group should review

Who Conducts the StudyAlthough in principle it

is possible for a group member to conduct the

Figure 6Criteria

of a Good Feasibility Study

Consultant

G G G G G

G G

G G

Previous experience conducting studies. Experience with the industry to be studied. Understands cooperatives. W illingness to listen to the groups ideas. W orks closely with designated contact members of the group. Accepts reasonable study revisions Accomplishes the study within an agreed deadline. W orks within the groups designated budget. Provides clear, useful information in the completed study.

samples of previously prepared studies and speak with others for whom the firm has worked before contracting with them. A pro e t o s fficient size and complexity may jc f u r equire several consultants to complete various aspects of the study. Multiple consultants can reduce the g roups dependency on a single person or company.t I also can permit the group to select experts from several fields. However, it also can complicate the coordination and consistency of the information received. Consultants should have experience in the industry under study. Otherwise, they may not corre t y cl identify critical factors. Given business complexity,i i ts almost impossible for one person to have experience in ala l reas. Some consulting firms resolve this issue by having feasibility specialists and contracting with industry experts to create a feasibility study. A team approach may result in a better study. For example, a cooperative development specialist from the USDA could work jointly with industry specialists to cre t a ae feasibility study. The consultant should also understand the unique aspects of cooperatives. Tax implications and business considerations of cooperatives diff r f m e ro those of other businesses. These factors could decrease o ic r n rease pro e t r s s jc ik. The consultant should avoid pre-conceived notions about how the project will function. The study should not be an "off-the-shelf" document assembled f rom previously created studies. Rather, the consultant should pay particular attention to the ideas that the g roup has developed and craft a unique study suited t teg o h roups needs. The consultant should work closely with the group and be receptive to its sugges-

tions. Also, the consultant should be prepared to make technical revisions or to corre t e ro s a t e g c r r t h roups r ecommendation. Revisions are a normal part of the process. Revisions should focus on the validity of the assumptions and the technical design of the study. Using an outside consultant brings objectivity to the feasibility study rather than merely providing the r esults that the group wants. Consultants have a legal obligation to provide a responsible analysis. They should not be asked to alter the results merely to conform to members desire f r a p j c v a i i y. s o ro e t s i b l t Timeliness is an important consideration when selecting a consultant. Pro e t a time sensitive. j c s re Usually, decisions to proceed await information provided in the feasibility study. S c re and diligence o a r equired for a well-crafted study must be balanced against the desire for speed. If a qualified consultant cannot complete a well-designed study within a timeframe that serves the groups needs, it should not be used. On the other hand, the timeline must be re l s i . aitc A consultant can only progre s a f s a a g s s a t s roup makes the required decisions, provides information to the consultant, and carries out its other pro e t responjc sblte. iiiis Cost is an important factor. The expertise and skills that consultants off r a p e roject must be weighed against their cost. A quicker timeline could increase a consultants fee. Preparing a pre-feasibility analysis may decrease the eff r required to complete the feasiot bility study and reduce the cost. Some public programs offred by the USDA e s Rural Business-Cooperative Service, community development offices, the Small Business Administration, and local business incubator programs provide techniclassac a ltl o n cs t g a s i t n e t i t e r o o t o roups creating feasblt suis iiiy tde. A consultant should provide the data used to generate the financial tables and scenarios reported in the feasibility study and preferably an electronic spreadsheet format that can be easily manipulated. Although requesting this information can moderately ic n rease the cost of a feasibility study, a c s t t e ces o h actual data permits the group to use the information for later needs with gre t r f e i i i y. This data also ae lxblt can reduce the cost in creating the business plan, if the g roup proceeds to that stage. It can also decrease the e o t require f r revisions, if in the future the group ff r d o changes the pro e t t d ff r f j c o i e rom those in the study. Once the consultant has been selected, the group should provide detailed instructions on the study r equirements. A paid consultant should be hired with

a legally binding contract between the parties. The g roup should consult legal counsel for assistance. The contract should state clearly the requirements and ro e l of both the group and the consultant. It should have timelines, delivery dates, explicit deliverables, and what is to be accomplished before payment is made. Often, the consultant receives a down payment before the feasibility study has been conducted. The balance is paid only after the study has been reviewed and accepted by the group (and possible financiers if appropriate). This gives the group more leverage to encourage timeliness or revisions. The contract should designate a third party arbitrator to resolve any disputed items. Before signing the contract, the group should discuss with the consultant arrangements for cost overr uns, time delays, revisions, and what considerations will be made for these issues. Changes after signing the contract can be costly or delay the study results. So all parties should be clear about what to expect prior to initiating the study.

How To Review the StudySelection of the

consultant does not end the group's responsibilities. A qualified member or a small committee should be designated to work closely with the consultant. These members work to assure that the feasibility study presents the groups ideas. They should track the study at all stages while reviewing and clarifying ideas during the study development process. Members with appropriate backgrounds and the ability to commit sufficient time to working with the consultant should be selected. These contact members r epresent the groups interests to the consultant. They a the contact to provide clarification and additional re information that the consultant may require. Plus, they should provide periodic reports to the group about the feasibility studys progress. They also should work with other group members and advisors to gather the information needed for the feasibility study. These members are obliged to express the wishes of the e t re g n i roup and not just their own. Members or outside financiers will often perceive t e re i b l t o t e e t re study based on its least h laiiy f h ni accurate piece. An otherwise well-conducted feasibility study could be viewed as inaccurate or useless because of a simple mistake. To prevent this, the feasibility study should be carefully examined for overall clarity and logical consistencyis the language appropriate; is the document well organized; and can some-

one who is not familiar with the project understand the study? Reviewers should confirm and explain the study assumptions. The feasibility study report documents pro e t jc e fforts. It serves as the written representation of the g roup. It outlines relevant conclusions from the study. Potential members, financiers, and others will use this document to help determine their support for the proj c . T e reports appearance as well as its content can et h influence peoples perception of it. The layout should be professional, well organized, and include a table of contents, page numbers, and re e f rences. Appendix C provides a sample report outline. Although the contact members take the lead in working with the consultant, others should review the study carefully before t e g h roup decides to accept it. Advisors such as cooperative development specialists or Extension agents can provide an objective review and offer insights on content or study assumptions. This outside review can be especially useful when the g roup has used consultants to prepare t e report. h Often, a series of draft reports are p resented to the g roup as the study proceeds. Changes are then conveyed to the consultant.

Accept the Completed StudyThe consultant

normally prepare a f n l report of key findings and s ia r ecommendations. The group usually makes the preliminary decision to accept or reject the study. Often the contact members, who have been working with the consultant and have the most knowledge of the feasibility study, make a recommendation to accept o reject. The final decision rests with at least the r steering committee and often is presented to entire g roup. Study approval should be based on its technical merits. Does it fulfill the work expectations that the g roup had when contracting with the consultant? Do the project ideas substantially diff r f e rom the group? Does the study contain significant errors? Is the study s fficiently comprehensive to permit the group to u make informed decisions about the pro e t I k y jc? f e information is lacking, the study should be revised. The decision to accept or reject a consultants work should not be influenced by the results of the feasibility study. A well-crafted, but negative study can prevent learning the same information later in the pro e t p j c rocess at considerable trouble and expense. By the same token, a feasibility study with positive r eturns should not be accepted merely because it makes the project seem possible.

W r t e records of the decision-making process itn should be made and retained. Group members have a l g l responsibility for due diligence. The groups ea attorney should be apprised of project developments and provide appropriate legal counsel.

technical limitations or machinery or design have been resolved.

Implementing an Accepted StudyOnce the

study has been accepted, the group must decide to implement or modify the project idea. This is often the time that the group must choose between competing project ideas. The feasibility study is an important tool used to assist this decision, but the group should not ignore o h r relevant factors such as pro e t r s a d i te jc ik n f the pro e t f t w t t e g j c i s i h h roups purpose. At this stage, the group can decide to implement, revise, or halt the project. In most major projects, the determination to implement is decided by the entire membership. Timing often is an issue that can affect the decision to proceed. From the moment a feasibility study is initiated to the time a project is implemented, both positive and negative factors can change. Positive re u t f s l s rom a feasibility study do not necessarily imply that the group should proceed with the project. Several factors could cause the group to s o o t revise the pro e t tp r o jc: G the situation has worsened since work on the study was completed; G t he group chose another project it considered more b n f c a ; eeiil G t e r s s required might be greater than the h ik g roup is willing to accept; G capital, size, or capacity requirements are more than the group can accommodate; G outside information shows key study assumptosa fut;o i n re a l y r G the study or the consultant may lack cre i i i y. dblt However, negative study results do not necessarily signify that a group should stop developing the projc.Teg e t h roup may cautiously proceed even if study r s l s a negative. However, any decision to contine u t re ue should carefully weigh the risks involved. Here a re some reasons for the group to consider continuing when the study did not provide favorable re u t : sls G the situation has improved since the study was completed; G critical assumptions of the study are unduly harsh or negative; G more persons or volume are included in the pro e t i c j c , n reasing it to viable levels; G the group has found a partner to share t e c s , h ot risk, capacity, e c o t; r

In most cases, if major changes occur to the projc ie a p e t d a s resented in the feasibility study, t e g h roup should re i e i t reflect these changes or initiate a vs t o new study. This permits the group members to make decisions with all applicable information. Some groups may proceed to develop a business plan with negative issues still pending. For example, a g roup may need greater volume of production for success, but feels that more p roducers will participate once the project is closer to implementation. A group should review the potential risks of pursuing this type of strategy.

Feasibility Study ReportThis report defines the project under development. It presents a series of assumptions on the design of the technical, financial, and operational aspects of the project and supports them with figures and tables. It also includes the pro forma financial statements to project income and expenses. The appearance of the report will change depending on the pro e t t e g j c , h roup, and the consultant who prepares the study. The document should describe pro e t e j c fforts to date and why it should be continued. The report should answer the following questions about the pro e t jc: G where is it now? G where does the group want to go? G why do they want this? G how will they accomplish this? G what resourc s a e re needed? G who will assist them? G when will this be completed? G how much will this cost? and G what are the risks?
There i n required length for a study report, but s o it should follow a simple format while still including the information required helping the group reach a decision. The primary points should be presented with supporting documentation in the appendices. Appendix C shows how a feasibility study could be designed. Differing industries or projects have diffre ing needs. The design of each study should serve the needs of the group or other clients. Although the study appearance may vary,al l r eports require particular elements if they are t b o e considered a complete feasibility study. They should

present a "holistic" view of the entire p roject. While specific project details may be undecided, a pro e t s jc potential for success or failure must be included. All studies must start with certain assumptions. The closer they are t re l t the more valuable the o a i y, study. If assumptions are overly optimistic or simplistic, members and investors may not value the re u t . sls A feasibility study should distinguish clearly between the hard facts and the assumptions. The sources for the facts and the rationale for key assumptions should be noted in a study appendix. A feasibility study should present the environment where the project will occur and describe its scope. The description should include the need for the project and how the group can accomplish the goals. The scope should include the key elements of all aspects of the pro e t P t n i l reaction by competitors jc. oeta should be included in the study. Key elements will change depending on the nature of each pro e t A a rule of thumb, if reasonjc. s able changes in a factor could make the project change f successful to unsuccessful, it is a key element. rom Examples could be the technology of production, volume of inputs, the market for goods sold, marketing channel, personnel cost, prices paid, and capital costs. A feasibility study should vary the possible r esults with changes in key elements of the pro e t jc. This controlled variation, called scenario analysis, permits planners to view which project elements are t e h most susceptible to positive and negative changes. This analysis also shows the impact on re u t o sls f changes in the assumptions. The study should always include the rationale for scenario selection. Both "worst-case" possibilities and optimistic scenarios should be compared. Comparative re u t f s l s rom scenari s a often presented in tables. o re A feasibility study report should indicate if the project design is technically possible. It should also show that the desired technologies could work in coordination. In projects with unproven technologies, this can be the most important aspect of a study. I p j c s n ro e t with proven technologies, the study can serve to corr ect design flaws before costly mistakes are implemented. Possible economic outcomes should be a prominent part of a feasibility study. Variation in these elements should be included in the scenario analysis. Operating costs and net revenues are factors that show i tep f h roject is economically viable. The study should contain pro-forma balance sheets, operating state-

ments, benefit-cost ratios, projected cash flows, and i t r a r t s o return for the project. These are nornenl ae f mally based on a 3-year pro e t o . jcin The study should include possible pro e t r s s jc ik for potential members and other investors; pro e t jc technology; potential legal and governmental setbacks; management and labor resources; and time-critical factors. Most importantly, the feasibility study should enable members to make constructive, informed decisions on whether to proceed with, revise, or abandon the pro e t jc.

Bankers ConsiderationsA cardinal rule in banking is to borrow from a lender who understands your business; or, conversely, never to lend money on a business project that you do not understand. Even though most groups involve their banker early in the process, a feasibility study is often conducted with an eye toward explaining the project to potential financiers. Bankers may have diffre t requirements e n f rom the study than group members. In many cases, the feasibility study is the formal pro e t p j c resentation to a lender.
Many groups work with bankers with whom they have an established personal or business relationship. This may expedite the process of obtaining financing. Nevertheless, the banker must know and understand the unique aspects of cooperatives. Bankers primary concerns focus on repayment, the banks exposure, and a pro e t s s rengths and jc t weaknesses. Bankers classify these concerns into the "-" 5Cs: G CapacityWhat is the groups ability to repay the loan? G CapitalWhat assets are being financed with the loan and how much is requested? G CharacterWho are the principals of the project? What is their background? G CollateralWhat is being used to guarantee the loan? How is it valued? and G ConditionsWhat additional factors can aff c et the loan? The odds for financing diminish if a banker cannot understand the basics of the project. The study should contain an executive summary and a financial blueprint so the banker can more easily understand the project. The executive summary should be short and to the point, but still provide an overview of the project. The financial blueprint gives information

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Figure 7Bankers'

Considerations for Feasibility Studie

The executive summary should contain:

G G

G G

Project purpose. What is it and who is involved? Repayment capacity. Can the investment to be recovered over a specic time period? Does it give investment (cost) parameters? Can it convince bankers the investment is needed, even if it is marginally feasible? Projected Financial Returns. What are projected revenues, operating costs, and net income? Economic Benets. What is the return on investment and the internal rate of return of the project

The nancial blueprint package should contain: G The assets to be nanced. G What is the project's funding potential and repayment terms? What is the rate of conversion to cash-liquidity? G What are internal (yields, costs, etc.) and external (ination, energy, etc.) project risks? What if the key assumptions are not perfect? What is the groups risk exposure? G Evaluate economic consequences. Do net reserves cover capital cost? Does the plan keep the project from capital erosion? G What are the projected cash ows, operating statements, and balance sheets? What are the source and use of funds G Financial commitment of members G Documentation. What rationale is used to support the assumptions?

r equired for calculating project risk and exposure on loans. Figure 7 p rovides more detail on what these sections should contain. The feasibility study should present information that serves both potential financiers and members. While bankers are potential clients for a study,t i should not be conducted mere y t p l o rove to them that ap roject is viable. However, s c e s o f i u hinges u c s r a l re on adequate financing. Consult with a banker prior to conducting a feasibility study to determine what factors the banker wants to see developed. This can speed the time that a bank needs to approve project financing or even improve the possibility of securing financing.

Implementing a ProjectDuring pro e t jc

development, it is important to plan ahead to avoid problems that can occur during implementation. The g roup should plan ahead even when many current decisions need to be made. Implementation is a particularly critical stage for a project. Although the g roup may feel overwhelmed or exhausted by this stage, they should not lose sight of the long-term horizon of the project. Using an implementation plan can assist the group during this tumultuous period. The organizational, legal, and financial matters must be well handled from the very beginning. Appendix D lists issues to consider when implementing a feasibility

study. N t a l p j c s w l require every detail listed. o l ro e t i l Often, the group appoints special committees to monitor the pro e t p j c rogre s i s e i i a s n p c f c reasfinance, legal, facilities, and marketing. These committees become the primary ways to report on progress in specific aspects of the project. Members are informed and educated about the subtleties of the project. This helps to build project support and understanding of any delays or cost overruns. I t e p j c requires construction of a sophistif h ro e t c t d f c l t such as a meatpacking or soybean proa e a i i y, cessing plant, professionals such as an architectural, engineering, or management specialist will need to be consulted early in the process. The needed expertise would be described in the feasibility study. Assistance will also be used for loan agreements, legal contracts, and construction. In many of the new generation cooperatives, management is hired early in the process even before the feasibility study has been completed. This can ass tep s i t h roject development although it considerably increases early project development costs. W illiam Patrie, in his "Creating Co-op Fever: A Rural Developers Guide to Forming Cooperatives" (RBS Service Report 54); provides information on this coope a i e s ructure rtv t . Once the project achieves a certain level of activit teg y, h roup hires a manager or pro e t d rector. T i jc i hs

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person should make the day-to-day decisions for the project. The board o d rectors should determine the f i general guidelines of these decisions. The manager must ensure the work meets specifications, construction proceeds on schedule, and monitor changes or delays. Obviously, more expensive and technical proj c s w l require a highly skilled manager. et il The elected directors or steering committee members must monitor the pro e t s p j c rogress. While the assistance of committees and managers can be helpful, the group must make the final decisions on the pro e t jc guidelines. They have been selected to represent the e t re g n i roup.

Appendix A
The Feasibility Study vs. the Business Plan
Groups often confuse the role of two tools used i p n roject developmentthe feasibility study and the business plan. Each has common components. Assuming positive feasibility study results, much of its information is incorporated into the business plan. It also contains other aspects. The feasibility study is conducted during the deliberation phase of project development before financing is secured. It shows if the project concept can be viable. This analytical tool includes several scenarisfrteg o o h roup to use in determining if it continues the project. If, after completing a feasibility study, t e h g roup decides to not proceed, there is no need to create a business plan. I teg f h roup decides to proceed, it prepare a s business plan for project implementation. The plan serves as a blueprint not only for implementation but also for what actions the group will take during pro e t jc operations. The business plan usually contains less emphasis on scenarios than the feasibility study. Typically, it elaborates only the scenario selected by the group as the most promising. The business plan is much more focused on what action steps will be taken during and after project implementation. The business plan is created after the feasibility study.P roject details, which required assumptions for the feasibility study, have been decided. Standard business plans include details such as key management personnel, business location, the financial package, product flow, and possible customers. The feasibility study presents an independent r eview of the project, so persons from outside of the g roup normally complete it. In contrast, the group typically develops its business plan internally. The group r evises the plan with information from bankers and investors once the project situation becomes more defined. Although this diffrence is not as important for e project development considerations, the feasibility study is only applicable for the developmental stage of ap roject. Businesses continue to use and revise their business plans after a project has been implemented. As the feasibility study refines the gro p s i i i l i e s u' nta da, the business plan uses information from the study to further prepare the project to evolve into an operating business.

Background Information SourcesSeveral

sources can guide groups considering a cooperative project. Both "How to Start a Cooperative" (RBS Cooperative Information Report 7) by Galen Rapp and Gerald Ely and "Co-ops 101, An Introduction to Cooperatives" (RBS Cooperative Information Report 55) by Donald Frederick are good re e f rences available f rom USDAs Rural Business-Cooperative Service. Another good source is the University of Wisconsin Center for Cooperatives website: http://www.wisc.edu/uwcc. Outside advisors can assist in the development process and provide other sources of background information.

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Appendix B:
Sample Feasibility Consultant Selection Criteria
Points A warded
G G G G G G G G

Previous experience creating feasibilitystudies Knowledge of the industry to be studied Qualifications of principal researchers or team Understanding of the cooperative structure Proposed interaction with designated members Verbal presentation/communication skills Reasonableness of cost Miscellaneous intangible Total Score

(-0 02) (-5 01) (-0 01) (-0 01) (-5 01) (-0 01) (-5 01) (-) 05 _____ 100

______ ______ ______ ______ ______ ______ ______ ______

Adapted from USDAs RBS Service Report 54, "Creating Co-op Fever: A Rural Developers Guide to Forming Cooperatives."

Appendix C:
Sample Feasibility Outline
A. Executive Summary B Table of Contents . C Summary of the Important Findings and . Recommendations: . Setting, Purpose, and Description of Pro e t l jc 2 Market Potential and Sourc o P . e f roduction Supplies 3 Technical Feature . s 4 Schedules of Net Benefits and Capital . Requirements 5 Benefit-Cost Ratios and Internal Rate of . Return 6 Project Benefits and Costs . 7 Proposed Financial Plan and Projected Cash . Flows 8 Recommendations for Implementation . D. Description of the Pro e t jc: . Nature o t e P l f h roject (technical processes, general size and location, what is produced, supplies, time horizon, etc.) 2 General Setting of the Project Location. .

3 Proposed Ownership, Structure, and . Management 4 Markets to be Served and Existing Suppliers . 5 Supplies and Competitive Users . 6 Sa . t ffing Requirements and Sourc s e E General Setting and Need for Pro e t . jc: . Physical, Economic, and Social Characteristics l (members and community) of the Project Are a 2 Regional, National, and International . Economic Relevance to Pro e t jc 3 Relevant Governmental Policies and Programs . 4 Description of the Problem Situation (which . would be solved by the pro e t jc) *. Impact and Consequences on Members (and 5 the community if needed) 6 Sampling Procedures and Survey Techniques . Used to Support Pro e t jc F. Market Potential for Goods or Services, Markets Served (current and future: ) . Form and Quality of Product or Service, l Markets Served, and Channels Used 2 Projected Total Demand in Markets to be . Served 3 Projected Competitive Supplies and Services . 4 Sales Potential and Projected Sales Prices . 5 Marketing Plan and Projected Marketing Costs .

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G. Raw Material Supply Potential/Procurement Plan: . Form and Quality of Materials Required and l Potential Supply Sourc s e 2 Projected Total Supply from Members and . Non-members 3 Projected Competitive Demand . 4 Procurement Potential and Projected Prices . 5 Procurement Plant and Projected Costs . 6 Form of Commitment of Raw Materials, . Marketing Agreements, etc. H. Supply of Labor and Other Key Inputs: . Form and Quality of Labor and Other Inputs l Required 2 Projected Total Supply from Sources Planned . 3 Projected Competitive Demand for Inputs . 4 Acquisition Plan, Training Program, and . Projected Costs . Technical Characteristics and Specifications: I . General Design and Technical Requirements l 2 Comparing Design and Expected Performance . with Existing Operations 3 Reasons for the Advantages of the Design . Selected 4 Proposed Sources of Supply and Method of . Acquisition 5 Proposed Procedures for Quality Control and . Construction Performance 6 Estimated Costs and Sources on Which . Estimates Are Based . Development Schedule and Production Plan: J . Citical Points in Sequence of Development and l Construction 2 Detailed Development and Construction . Calendar 3 Procedures for Controlling Development . Schedule 4 Production Startup and Initial Performance (or . Yi l s ed) 5 Schedule of Transition to Full Production and . Controls to Ensure that Schedule Will Be Met 6 Development and Production Plan Schedules . K Capital Requirements and Investment Schedule: . . Estimated Capital Cost for Major Facilities and l Equipment 2 Estimated Capital Cost for Marketing and . Related Facilities 3 Replacement Schedules for Equipment and . Fclte aiiis

4 Estimated Working Capital Requirements . 5 Schedule of Estimated Total Capital . Investment L Sales Plan and Revenue Schedule: . . Seasonal Patterns of Product Demand and l Prices 2 Storage Program and Projected Monthly Sales . Schedule 3 Projected Net Monthly Product Prices . 4 Projected Revenue Schedule for the Pro e t . jc Planning Period 5 Pooling Arrangements . M. Projected Operating Costs and Net Revenue: . Raw Material Costs l 2 Labor Costs . 3 Other Supply Costs . 4 Management and Related Costs . 5 Repair and Maintenance Costs . 6 Costs for Research and Development, . Overhead, and Other Service Functions 7 Combined Annual Operating Costs . 8 Projected Net Revenue for the Planning Period . N. Schedule of Net Benefits - Partial Budget: . Schedule of Added Net Income From Pro e t l jc 2 Schedule of Net Revenue Replaced by Pro e t . jc (farenovation pro e t i jc) 3 Schedule of Combined Total Net Benefits fro m . Pro e t jc O. Economic Feasibility of Pro e t jc: . Present Value of Investment and Net Benefits l at Alternative Discount Rates 2 Benefit-Cost Ratios and Internal Rate of . Return for Pro e t jc 3 Sources and Schedule of Benefits Associated . with the Pro e t jc 4 Sources and Schedule of Costs Associated with . the Pro e t jc 5 Present Value of the Combined Schedules of . Associated Benefits and Costs 6 Project Potential in Relation to the . Opportunity Cost of Capital and Summary of Economic Feasibility 7 Sensitivity Tests: What if Prices and Costs Vary . 8 Other Financial Ratios as Needed . P. Financial Plan for Pro e t jc: 1 Proposed Equity Investment by Sourc o . e f Funds

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2 Proposed Sources, Schedule, and Terms of . Loans for Meeting Balance of Capital Requirements 3 Projected Cash Flow by Sector under Proposed . Financing Plan 4 Projected Schedules of Depreciation, Intere t . s and Taxes 5 Pro-forma Balance Sheets and Operating . Statements (3 years) 6 Pooling Arrangements . 7 Pro-forma Source and Application of Funds . 8 Summary of Financial Plan and . Recommendation for Implementation 9 Impacts on Members: Impact on the . Cooperative Q. Appendices and Notes: 1 Resume or Credentials of Person or Company . Who Completed the Study 2 List Key Assumptions and Validations for . Their Use 3 List Footnoted Sources for the Document .

Appendix D:
Feasibility Study and Business Plan Implementation Considerations
. Fiscal and Legal Responsibilities of Members: I A. Incorporate - (if new cooperative) B Pass bylaws - (if new cooperative) . C Amend bylaws (if required for an existing . cooperative) D. Provide equity capital E Sign marketing agreements . F. E e t d rectors - (if new cooperative) lc i G. Vote to implement pro e t jc I Legal Actions or Decisions of Board of Dire t r : I . cos A. Proceed with pro e t jc B Select lender and apply for loan . C Establish committees of members . D. Hire manager E Engage attorney . F. Employ auditor G. Engage arc i e t p h t c , roject engineer, and/or general contractor H. Establish bidding procedure s . Hire consultants I . Get clearances from various governmental J agencies to proceed with pro e t jc II Financing: I. A. Loan closing 1 Sign of documents . 2 Review special provisions (all loan agre . ements will include a number of special provisions that must be followed. Both borrower and lender should understand these covenants.) 3 Line of credit. Drawing of fund schedule . 4 Repayment terms . B Bank accounts . 1 Bonding . 2 Escrow account . 3 Keeping lender informed of unusual . events IV. Legal Matters of Pro e t jc: A. Loan closing B Contract bidding . C Preparing or reviewing all contracts with all . contractors working on pro e t jc

(Revised from Internal RBS Staff Papers)

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D. Helping secure clearances for project zoning, health, EPA, water, sewage, etc. E Mergers/consolidations . V. Project Manager: A. General manager of cooperative B Pro e t a . j c rchitect or engineer C General contractor . V . Preparation of Facility: I A. Recommendation of the manager . Shakedown and trial runs l B Acceptance by the board o d rectors . f i . W arranties l 2 Escrows . C Dedication of pro e t . jc V I Begin Operations I. A. Training employees B Monitoring of operation by appropriate engi. neers C Changes in operating procedure . s D. Full operation V I . Evaluation of Pro e t II jc

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U.S. Department of Agriculture

Rural BusinessCooperative Service
Stop 3250 Washington, D.C. 20250-3250

Rural BusinessCooperative Service (RBS) provides research, management, and educational assistance to cooperatives to strengthen the economic position of farmers and other rural residents. It works directly with cooperative leaders and Federal and State agencies to improve organization, leadership, and operation of cooperatives and to give guidance to further development. The cooperative segment of RBS (1) helps farmers and other rural residents develop cooperatives to obtain supplies and services at lower cost and to get better prices for products they sell; (2) advises rural residents on developing existing resources through cooperative action to enhance rural living; (3) helps cooperatives improve services and operating efficiency; (4) informs members, directors, employees, and the public on how cooperatives work and benet their members and their communities; and (5) encourages international cooperative programs. RBS also publishes research and educational materials and issues Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact USDAs TARGET Center at (202) 720-2600 (voice and TDD). To le a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, D.C. 20250-9410 or call (202) 720-5964 (voice or TDD). USDA is an equal opportunity provider and employer.