United StatesDepartment ofAgriculture

Rural Business–CooperativeService

RBS ServiceReport 58

Cooperative FeasibilityStudy Guide

Preface This guide has been designed to assist agricultural cooperatives in completing a feasi-bility study. Rather than being a complete handbook, this publication presents theimportant elements to consider when conducting a feasibility study.

The guide contains information on whether or not a group should conduct a feasibilitystudy, the steps involved, how to evaluate a study, and how to implement one oncecompleted. 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

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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 definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Group characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Group decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Feasibility study decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

1. Conduct the study? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

2. Idea identification and clarification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .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

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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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Cooperative Feasibility Study Guide

James MatsonCooperative Development Specialist

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The Project Development Process

The feasibility study is an integral part in devel-oping a business project. Whether it’s for the creationof a new cooperative or the expansion of an existingone, the project cycle is similar. In "How to Start aCooperative"(RBS CIR 7), Galen Rapp and Gerald Elypresent a 16-step sequence of events recommended forcreating an agricultural cooperative. This guide is anexpansion of the seventh step, now to conduct the fea-sibility study.

For purposes of cooperative development, thecomponents in this cycle can be divided into five basicstages (figure 1). Figure 2 summarizes activities thatoccur in each phase of the cycle.

Differing amounts of time may be required foreach stage in the project cycle, depending on the partic-ulars of the project and the group involved. Typically,it takes 2 years or even more for a cooperative projectto move from preliminary planning to project execu-tion.

Key aspects of the project cycle seem to recur dur-ing the development process. The informationobtained in the evaluation stage provides the impetusfor the idea pursued in the next round of planning.This cycle is a series of ever-improving estimates as tohow the project will function. Each cycle providesmore information. When evaluated and applied to thesucceeding phase, ways to accomplish the project comeinto sharper focus.

Figure 1—The Project Cycle

One stage of the project cycle is deliberation.Planners’ focus should be on whether to proceed withthe project. The feasibility study should be conductedduring this stage, before the group decides to imple-ment or terminate the project. Planners need to knowthe requirements for a successful project. The feasibili-ty study serves as an important tool for the group'sdeliberations.

Why Prepare Feasibility Studies?Developing any new business venture is difficult.

Taking a project from the initial idea through the oper-ational stage is a complex and time-consuming effort.Most ideas, whether from a cooperative or an investor-owned business, do not develop into business opera-tions. If these ideas make it to the operational stage,most fail within the first 6 months. Before the potentialmembers invest in a proposed business project, theymust determine if it can be economically viable andthen decide if investment advantages outweigh therisks involved.

Many cooperative business projects are quiteexpensive to conduct. The projects involve operationsthat differ from those of the members’ individual busi-ness. Often, cooperative businesses’ operations involverisks with which the members are unfamiliar. Thestudy allows groups to preview potential project out-comes and to decide if they should continue. Althoughthe costs of conducting a study may seem high, theyare relatively minor when compared with the totalproject cost. The small initial expenditure on a feasibil-ity study can help to protect larger capital investmentslater.

Feasibility studies are useful and valid for manykinds of projects. Evaluation of a new business ven-ture, both from new groups and established business-es, is the most common, but not the only usage.Studies can help groups decide to expand existing ser-vices, build or remodel facilities, change methods ofoperation, add new products, or even merge with

another business. A feasibility study assists decision-makers whenever they need to consider alternativedevelopment opportunities.

Feasibility studies permit planners to outlinetheir ideas on paper before implementing them. Thiscan reveal errors in project design before their imple-mentation negatively affects the project. Applying thelessons gained from a feasibility study can significant-ly lower the project costs.

The study presents the risks and returns associat-ed with the project so the prospective members canevaluate them. There is no "magic number" or correctrate of return a project needs to obtain before a groupdecides to proceed. The acceptable level of return andappropriate risk rate will vary for individual membersdepending on their personal situation.

Cooperatives serve the needs and enhance theeconomic returns of their members, and not outsideinvestors, so the appropriate economic rate of returnfor a cooperative project may be lower than thoserequired by projects of investor-owned firms. Potentialmembers should evaluate the returns of a cooperativeproject to see how it would affect the returns of all oftheir business operations.

The proposed project usually requires both riskcapital from members and debt capital from banks andother financiers to become operational. Lenders typi-cally require an objective evaluation of a project priorto investing. A feasibility study conducted by someonewithout a vested interest in the project outcome canprovide this assessment.

What Is a Feasibility Study?This analytical tool used during the project plan-

ning process shows how a business would operateunder a set of assumptions — the technology used (thefacilities, equipment, production process, etc.) and thefinancial aspects (capital needs, volume, cost of goods,wages etc.). The study is the first time in a projectdevelopment process that the pieces are assembled tosee if they perform together to create a technical and

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Figure 2—The Project Cycle Described

Identification: preliminary idea creation, planning, and pre-feasibility studies to refine ideas.

Deliberation: ormalization of group, conducting feasibility studies, and decision to proceed.

Implementation: securing capital, construction, obtaining permits, and hiring management.

Execution: mobilization of manpower, equipment, and materials to carry out the plan.

Evaluation: determine what did and did not work (to plan again).

economically feasible concept. The study also showsthe sensitivity of the business to changes in these basicassumptions.

Feasibility studies contain standard technical andfinancial components, as discussed in more detail laterin this report. The exact appearance of each studyvaries. This depends on the industry studied, the criti-cal factors for that project, the methods chosen to con-duct the study, and the budget. Emphasis can beplaced on various sections of an individual feasibilitystudy depending upon the needs of the group forwhom the study was prepared. Most studies havemultiple potential uses, so they must be designed toserve everyone’s needs.

The feasibility study evaluates the project’spotential for success. The perceived objectivity of theevaluation is an important factor in the credibilityplaced on the study by potential investors andfinanciers. Also, the creation of the study requires astrong background both in the financial and technicalaspects of the project. For these reasons, outside con-sultants conduct most studies.

Feasibility studies for a cooperative are similar tothose for other businesses, with one exception.Cooperative members use it to be successful inenhancing their personal businesses, so a study con-ducted for a cooperative must address how the projectwill impact members as individuals in addition to howit will affect the cooperative as a whole.

Feasibility Study LimitationsAlthough the feasibility study is a useful tool for

project deliberation, it has limitations. There are sever-al purposes for which a study cannot or should not beapplied.

A study should be conducted to evaluate specificprojects. Simulations or projection models, althoughuseful, do not replace a specific feasibility study of aproject. The study should not only consist of genericmarket information but also should be tailored for thespecific project.

A feasibility study is not an academic or researchpaper. A completed study should permit a group tomake better decisions about the strategic issues of itsspecific project. The study is not a business plan that isdeveloped later in the project development processand functions as a blueprint for the group’s businessoperations (Appendix A). The plan presents thegroup's intended responses to the critical issues raisedin the study. The results form the basis for developinga business plan.

A study is not intended to identify new ideas orconcepts for a project. These ideas should be clearlyidentified before a study is initiated. The group needsto accomplish a number of steps before a feasibilitystudy is instituted. The closer the assumptions lie tothe "real world," the more value a study will hold forthe group.

A study should not be conducted as a foru mmerely to support a desire that the project will be suc-cessful. Rather, it should be an objective evaluation ofthe project's chance for success. Studies with both posi-tive and negative conclusions can assist a group’s deci-sions.

Financiers may require a feasibility study beforeproviding loans, but this should not be the study’sonly purpose. It should enhance a banker's ability toevaluate a project. The primary goal should be to aidthe group's decisions, not to secure financing.

A study will not determine if it is advisable toinitiate a project. The potential members have todecide if the economic returns justify the risksinvolved in their continuing the project. The studyresults should assist them. A study analyzes basic pro-ject assumptions, shows how results vary whenassumptions change, and provides guidance as to criti-cal elements of a project. Conducting a study shouldprovide the group with project-specific informationand assist it in making decisions. This should lowerthe risks in continuing a project.

Creating a Feasibility StudyThe creation of a feasibility study, although part

of the project cycle, contains a process in itself. Allstudies have four key factors: project definition, groupcharacteristics, group decisions, and feasibility studydecisions.

Project Definition—In a successful cooperativeproject, a core group of people must feel the need towork together to solve a problem or take advantage ofa business opportunity. Improving the situation as agroup provides the context for a cooperative businessproject. This project must be understood. The groupmust believe it can achieve the goal. Often, a fewindividuals provide the spark for the idea, but groupinteraction permits them to hone its idea and developsufficient interest. In addition, the group discoverscommon interests that can make a cooperative aneffective organization.

The initial ideas of the group must have coa-lesced into a clearly stated project, before a feasibility

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study can be conducted. The ideas also must havebeen developed to the stage where hoped-for goals canbe quantified.

Cooperatives work best when participants see amutual benefit from working jointly rather than actingalone to achieve a goal. Members voluntarily choose tobelong to a cooperative because they see some poten-tial benefit. When a project can be addressed jointlyand potential member interest exists, then a coopera-tive can be the solution. A study is not needed unlessthere is a specific project. This project must be:

a. defined, understood, described, and quanti-fied;

b. significant, broad, and large enough to war-rant group action;

c. capable of a solution for purely economic andtechnical reasons.

d. economically, culturally, and socially fittingfor the group; and

e. considered a reasonable solution by groupmembers.

When all these elements exist in a project idea, asuccessful cooperative can be developed. If any arelacking, the concept must be revised before proceedingwith the project.

Group Characteristics—For any cooperativeproject to be a success it must be large enough toachieve a "critical mass." That number depends on theproduct, scope, and economic resources available.Sufficient support is critical for developing acooperative project. A smaller number of individualswho are fully committed to a project can have a higherchance of success than a larger number who are onlypartially committed.

Attendance at organizational meetings, surveyresults expressing support, and willingness to work todevelop the project are needed to demonstrate sup-port. Financial backing of members is perhaps the bestmethod that a group has to express that support. Afeasibility study seeks to determine the number ofmembers or product volume required for the project tosucceed.

Advisors and consultants can be useful to agroup during its formation. This assistance may comefrom outsiders such as Extension agents or lenderswho interact closely with the group. This assistancemay be in a specific area such as bookkeeping or legalstructure with the help provided by accountants andlawyers. The group may seek outside help to focus its

ideas or with strategic planning and organization.Advisors such as USDA cooperative development spe-cialists can guide the group through the developmentprocess. They can also help to assure that all the mem-bers’ ideas are considered.

Outside advisors, while useful to the group,should not drive the process. The project should bedeveloped for the group's benefit. Leadership shouldcome from within the group and it should make thefinal decisions on the project's direction. Outsiders, nomatter how well intentioned, should not fill this role.

Group Decisions—Strong leadership is essential fordefining the project and deciding if a feasibility studyshould be conducted. Outside assistance can be useful,but the project’s vision and direction should comefrom the group. Informed leadership with enlightenedself-interest and a commitment to group action isneeded. Leaders must maintain sufficient creativestress to bring all parties to a decision aboutcontinuing with a feasibility study.

Strong leadership is necessary, but for a project tosucceed, all potential members of a new cooperativebusiness venture must be informed so they feel com-mitted to the project. One or a few aggressive individ-uals may cut short the deliberation process and force apremature decision. To prevent this, the group shouldform a steering committee of the most active membersto guide the project development process. This com-mittee should keep the group informed on the project’sprogress.

Decision-makers should take a simple test thatprovides a good guideline: (1.) If I choose an actionand my decision proves to be wrong, what would bethe cost? and (2.) If I make no decision, what would itcost? If the cost of making a wrong decision is relative-ly small, do not spend much time, money, or effort onthe decision-making process. On the other hand, if thecost of committing an error could be large, it’s better toput more emphasis on determining the pros and consbefore choosing.

In practice, that is not easy to implement, espe-cially with groups where each member has an individ-ual personality and decision-making method. Somemay be slower to learn, need time to contemplatebefore taking a decision, have aversions to high risk, orbelieve that time and money spent to research a projectare a waste. Some members may want to decide beforerelevant information has arrived. Balancing thesediverse sentiments within a group can be difficult.

Decision-making often is one of the greatest ini-tial challenges that a group faces in developing a pro-

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ject. Figure 3 presents some guidelines to assist groupswith the process. The ideas can help to create a systemfor making decisions. This should permit positiveprogress in the development of the project.

Given the difficulty in making decisions, somegroups or individuals try to avoid it. This tactic is notrecommended. Not making or postponing a decisionare decisions in themselves. There is always moreinformation that can be gathered, but there is also acost to taking more time to deliberate. A decision mustbe made when further investigation costs more thannew information is worth.

Feasibility Study Decisions—There are momentswhen the group has to make key decisions. Taking thetime to think through each of these decisions canincrease the value of a feasibility study. Decisionslisted in Figure 4 have a logical flow and are presentedin chronological order discussed in the followingsections.

Conduct the Study? Often groups proceed directlyto the feasibility study and overlook the importance inmaking this first decision with deliberation. Take thetime to determine if a feasibility study is appropriate.Moreover, if this decision is conducted thoughtfully,the group will probably have established a procedurefor decision-making. Then, the decisions that thegroup needs to make later in the development processwill probably come easier and the likelihood of beingcorrect will be greater.

Carefully consider whether to conduct a feasibili-ty study will save much time and money and increasethe study value once completed. No group has unlim-ited resources. The study is a critical tool in projectdevelopment, so money spent on it reduces theamount available for project development areas. Thestudy should return the maximum benefit to the groupfor the money invested.

Idea Identification and Clarification—Prior toinitiating a feasibility study, the group needs to sketchout possible design of the project. This can begin withthe "back of the envelope" calculations and proceedthrough a formal pre-feasibility study for complexprojects. Begin by accumulating information needed tofocus the direction of the project.

In many cases, more than one idea has been sug-gested as potential projects. Some concepts may beimpractical or appear good on the surface but are notpossible when further studied. Some may require moreexplanation. Delve into the proposed ideas to extractthe most advantageous elements of each. Typically, themost successful projects combine the best aspects ofmany different ideas into one clearly defined project.This initial elaboration provides a framework to devel-op the project. If indications are positive, this frame-work can be expanded with a comprehensive feasibili-ty study.

The steering committee and internal decision-makers normally perform this task. Gathering theneeded information for this preliminary evaluationbegins with identifying an idea. The group and possi-bly its advisors work together to gather preliminaryinformation. It can be discussed informally or present-ed in a formal document. In either case, the informa-tion gathered will be needed later if the group pro-ceeds with a feasibility study.

Study Assumptions—Key project assumptionsshould be determined prior to initiating a feasibilitystudy. It cannot analyze every variation of a project, sothe group must provide study boundaries. At a

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Figure 3— Guidelines for Group Decisions

� Unanimous agreement is not required to move for-ward.

� Never decide to proceed based solely on nega-tive reactions, such as resentment or envytoward middlemen, lenders, etc.

� A few reliable persons are superior to a largernumber of doubtful persons.

� Avoid promises of what the cooperative cando.

� Base expectations on economic and social reali-ties faced by the cooperative.

� Make each decision only once.

Figure 4—Decisions for Feasibility Studies

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

minimum, the group should be able to provide generalanswers to the four questions presented in Figure 5.Examples of the type of information where the groupmay already have information or need to makeassumptions are included.

Obviously, the group might not know the exactdetails of all project aspects. Several options may seempossible so the group must gather more informationthat permits it to decide among them. Consideringmore than one possible structure is not a problem atthis stage. However, the group should strive to answerthe four questions for each possible project scenario.The feasibility study can help the group to reach adecision between project options or to see economicoutcomes from different situations. The more focusedthe project design before implementing a feasibilitystudy, the more likely the study will be of use.

Who Conducts the Study—Although in principle itis possible for a group member to conduct the

feasibility study, outsider consultants produce most.Prospective members and financiers see the objectiveevaluation of a project concept with a feasibility studyas an important aspect of the study. This objectivitycan provide a group with helpful information thatmight have been overlooked by those participatingdirectly in the project.

Hiring a consultant to create the study can be themost important decision in the creation of the study. Agroup should use a good consultant for the project.Figure 6 provides possible criteria for selecting a goodconsultant. A group should determine if a consultantis technically qualified to create a feasibility study. Inaddition, a consultant must have the demeanor towork well with a particular group. (See Appendix Bfor a sample of a consultant selection guide.)

Does the consultant have an adequate back-ground to prepare the study? The group should review

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Figure 5—Feasibility Study Assumptions

Is the project needed?

� What is the product or service? What is the essence of the project? (There can be more than one. Each should be

clearly defined.)

� What is the group's comparative advantage? What is the market demanding and what do producers do well?

� How will the project benefit the members?

� 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.)

� What is the support by producers, community, and potential lenders?

� What is the number and size of producers who are willing to participate?

� What volume of product will be included in the project?

� What future expansion of both membership and volume is possible?

What is the competitive outlook?

� What will prices be for both inputs and outputs?

� What is the anticipated volume of sales?

� What is the size of the market?

� Who are the major competitors? What are their market shares, facilities, and business structures?

� Will the group use strategic alliances to accomplish its goals?

What are the organizational needs for the project?

� What are the capital needs and possible sources of this capital? How much money is needed?

� What are the budgeting and financial needs? What are possible sources for financing?

� What are the legal requirements? What documents or agreements are needed? What permits and inspections will the

project require?

� What facilities are needed? Will the group purchase, build, or lease the facilities?

� 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?

samples of previously prepared studies and speakwith others for whom the firm has worked before con-tracting with them.

A project of sufficient size and complexity mayrequire several consultants to complete various aspectsof the study. Multiple consultants can reduce thegroup’s dependency on a single person or company. Italso can permit the group to select experts from sever-al fields. However, it also can complicate the coordina-tion and consistency of the information received.

Consultants should have experience in the indus-try under study. Otherwise, they may not correctlyidentify critical factors. Given business complexity, it isalmost impossible for one person to have experience inall areas. Some consulting firms resolve this issue byhaving feasibility specialists and contracting withindustry experts to create a feasibility study. A teamapproach may result in a better study. For example, acooperative development specialist from the USDAcould work jointly with industry specialists to create afeasibility study.

The consultant should also understand theunique aspects of cooperatives. Tax implications andbusiness considerations of cooperatives differ fro mthose of other businesses. These factors could decreaseor increase project risks.

The consultant should avoid pre-conceivednotions about how the project will function. The studyshould not be an "off-the-shelf" document assembledfrom previously created studies. Rather, the consultantshould pay particular attention to the ideas that thegroup has developed and craft a unique study suitedto the group’s needs. The consultant should workclosely with the group and be receptive to its sugges-

tions. Also, the consultant should be prepared to maketechnical revisions or to correct errors at the group’srecommendation. Revisions are a normal part of theprocess.

Revisions should focus on the validity of theassumptions and the technical design of the study.Using an outside consultant brings objectivity to thefeasibility study rather than merely providing theresults that the group wants. Consultants have a legalobligation to provide a responsible analysis. Theyshould not be asked to alter the results merely to con-form to members’ desires for a project’s viability.

Timeliness is an important consideration whenselecting a consultant. Projects are time sensitive.Usually, decisions to proceed await information pro-vided in the feasibility study. So care and diligencerequired for a well-crafted study must be balancedagainst the desire for speed. If a qualified consultantcannot complete a well-designed study within a time-frame that serves the group’s needs, it should not beused. On the other hand, the timeline must be realistic.A consultant can only progress as fast as a groupmakes the required decisions, provides information tothe consultant, and carries out its other project respon-sibilities.

Cost is an important factor. The expertise andskills that consultants offer a project must be weighedagainst their cost. A quicker timeline could increase aconsultant’s fee. Preparing a pre-feasibility analysismay decrease the effort required to complete the feasi-bility study and reduce the cost.

Some public programs offered by the USDA’sRural Business-Cooperative Service, community devel-opment offices, the Small Business Administration,and local business incubator programs provide techni-cal assistance at little or no cost to groups creating fea-sibility studies.

A consultant should provide the data used togenerate the financial tables and scenarios reported inthe feasibility study and preferably an electronicspreadsheet format that can be easily manipulated.Although requesting this information can moderatelyincrease the cost of a feasibility study, access to theactual data permits the group to use the informationfor later needs with greater flexibility. This data alsocan reduce the cost in creating the business plan, if thegroup proceeds to that stage. It can also decrease theeffort required for revisions, if in the future the groupchanges the project to differ from those in the study.

Once the consultant has been selected, the groupshould provide detailed instructions on the studyrequirements. A paid consultant should be hired with

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Figure 6—Criteria of a Good Feasibility StudyConsultant

� 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 mem-bers of the group.

� Accepts reasonable study revisions� Accomplishes the study within an agreeddeadline.

� W orks within the group’s designated budget.� Provides clear, useful information in the com-pleted study.

a legally binding contract between the parties. Thegroup should consult legal counsel for assistance. Thecontract should state clearly the requirements and roleof both the group and the consultant. It should havetimelines, delivery dates, explicit deliverables, andwhat is to be accomplished before payment is made.

Often, the consultant receives a down paymentbefore the feasibility study has been conducted. Thebalance is paid only after the study has been reviewedand accepted by the group (and possible financiers ifappropriate). This gives the group more leverage toencourage timeliness or revisions. The contract shoulddesignate a third party arbitrator to resolve any dis-puted items.

Before signing the contract, the group should dis-cuss with the consultant arrangements for cost over-runs, time delays, revisions, and what considerationswill be made for these issues. Changes after signingthe contract can be costly or delay the study results. Soall parties should be clear about what to expect priorto initiating the study.

How To Review the Study—Selection of theconsultant does not end the group's responsibilities. Aqualified member or a small committee should bedesignated to work closely with the consultant. Thesemembers work to assure that the feasibility studypresents the group’s ideas. They should track thestudy at all stages while reviewing and clarifying ideasduring the study development process.

Members with appropriate backgrounds and theability to commit sufficient time to working with theconsultant should be selected. These contact membersrepresent the group’s interests to the consultant. Theyare the contact to provide clarification and additionalinformation that the consultant may require. Plus, theyshould provide periodic reports to the group about thefeasibility study’s progress. They also should workwith other group members and advisors to gather theinformation needed for the feasibility study. Thesemembers are obliged to express the wishes of theentire group and not just their own.

Members or outside financiers will often perceivethe reliability of the entire study based on its leastaccurate piece. An otherwise well-conducted feasibili-ty study could be viewed as inaccurate or uselessbecause of a simple mistake. To prevent this, the feasi-bility study should be carefully examined for overallclarity and logical consistency—is the language appro-priate; is the document well organized; and can some-

one who is not familiar with the project understandthe study? Reviewers should confirm and explain thestudy assumptions.

The feasibility study report documents projectefforts. It serves as the written representation of thegroup. It outlines relevant conclusions from the study.Potential members, financiers, and others will use thisdocument to help determine their support for the pro-ject. The report’s appearance as well as its content caninfluence people’s perception of it. The layout shouldbe professional, well organized, and include a table ofcontents, page numbers, and references. Appendix Cprovides a sample report outline.

Although the contact members take the lead inworking with the consultant, others should review thestudy carefully before the group decides to accept it.Advisors such as cooperative development specialistsor Extension agents can provide an objective reviewand offer insights on content or study assumptions.This outside review can be especially useful when thegroup has used consultants to prepare the report.Often, a series of draft reports are presented to thegroup as the study proceeds. Changes are then con-veyed to the consultant.

Accept the Completed Study—The consultantnormally prepares a final report of key findings andrecommendations. The group usually makes thepreliminary decision to accept or reject the study.Often the contact members, who have been workingwith the consultant and have the most knowledge ofthe feasibility study, make a recommendation to acceptor reject. The final decision rests with at least thesteering committee and often is presented to entiregroup.

Study approval should be based on its technicalmerits. Does it fulfill the work expectations that thegroup had when contracting with the consultant? Dothe project ideas substantially differ from the group?Does the study contain significant errors? Is the studysufficiently comprehensive to permit the group tomake informed decisions about the project? If keyinformation is lacking, the study should be revised.

The decision to accept or reject a consultant’swork should not be influenced by the results of thefeasibility study. A well-crafted, but negative studycan prevent learning the same information later in theproject process at considerable trouble and expense. Bythe same token, a feasibility study with positivereturns should not be accepted merely because itmakes the project seem possible.

8

W ritten records of the decision-making processshould be made and retained. Group members have alegal responsibility for due diligence. The group’sattorney should be apprised of project developmentsand provide appropriate legal counsel.

Implementing an Accepted Study—Once thestudy has been accepted, the group must decide toimplement or modify the project idea. This is often thetime that the group must choose between competingproject ideas. The feasibility study is an important toolused to assist this decision, but the group should notignore other relevant factors such as project risk and ifthe project fits with the group’s purpose. At this stage,the group can decide to implement, revise, or halt theproject. In most major projects, the determination toimplement is decided by the entire membership.

Timing often is an issue that can affect the deci-sion to proceed. From the moment a feasibility study isinitiated to the time a project is implemented, bothpositive and negative factors can change.

Positive results from a feasibility study do notnecessarily imply that the group should proceed withthe project. Several factors could cause the group tostop or to revise the project:

� the situation has worsened since work on thestudy was completed;

� the group chose another project it consideredmore beneficial;

� the risks required might be greater than thegroup is willing to accept;

� capital, size, or capacity requirements are morethan the group can accommodate;

� outside information shows key study assump-tions are faulty; or

� the study or the consultant may lack credibility.

However, negative study results do not necessari-ly signify that a group should stop developing the pro-ject. The group may cautiously proceed even if studyresults are negative. However, any decision to contin-ue should carefully weigh the risks involved. Here aresome reasons for the group to consider continuingwhen the study did not provide favorable results:

� the situation has improved since the study wascompleted;

� critical assumptions of the study are undulyharsh or negative;

� more persons or volume are included in theproject, increasing it to viable levels;

� the group has found a partner to share the cost,risk, capacity, etc; or

� technical limitations or machinery or designhave been resolved.

In most cases, if major changes occur to the pro-ject idea as presented in the feasibility study, the groupshould revise it to reflect these changes or initiate anew study. This permits the group members to makedecisions with all applicable information.

Some groups may proceed to develop a businessplan with negative issues still pending. For example, agroup may need greater volume of production for suc-cess, but feels that more producers will participateonce the project is closer to implementation. A groupshould review the potential risks of pursuing this typeof strategy.

Feasibility Study Report—This report defines theproject under development. It presents a series ofassumptions on the design of the technical, financial,and operational aspects of the project and supportsthem with figures and tables. It also includes the pro-forma financial statements to project income andexpenses.

The appearance of the report will changedepending on the project, the group, and the consul-tant who prepares the study. The document shoulddescribe project efforts to date and why it should becontinued. The report should answer the followingquestions about the project:

� where is it now?� where does the group want to go?� why do they want this?� how will they accomplish this?� what resources are needed?� who will assist them?� when will this be completed?� how much will this cost? and� what are the risks?

There is no required length for a study report, butit should follow a simple format while still includingthe information required helping the group reach adecision. The primary points should be presented withsupporting documentation in the appendices.Appendix C shows how a feasibility study could bedesigned. Differing industries or projects have differ-ing needs. The design of each study should serve theneeds of the group or other clients.

Although the study appearance may vary, allreports require particular elements if they are to beconsidered a complete feasibility study. They should

9

present a "holistic" view of the entire project. Whilespecific project details may be undecided, a project’spotential for success or failure must be included.

All studies must start with certain assumptions.The closer they are to reality, the more valuable thestudy. If assumptions are overly optimistic or simplis-tic, members and investors may not value the results.A feasibility study should distinguish clearly betweenthe hard facts and the assumptions. The sources for thefacts and the rationale for key assumptions should benoted in a study appendix.

A feasibility study should present the environ-ment where the project will occur and describe itsscope. The description should include the need for theproject and how the group can accomplish the goals.The scope should include the key elements of allaspects of the project. Potential reaction by competitorsshould be included in the study.

Key elements will change depending on thenature of each project. As a rule of thumb, if reason-able changes in a factor could make the project changefrom successful to unsuccessful, it is a key element.Examples could be the technology of production, vol-ume of inputs, the market for goods sold, marketingchannel, personnel cost, prices paid, and capital costs.

A feasibility study should vary the possibleresults with changes in key elements of the project.This controlled variation, called scenario analysis, per-mits planners to view which project elements are themost susceptible to positive and negative changes.This analysis also shows the impact on results ofchanges in the assumptions. The study should alwaysinclude the rationale for scenario selection. Both"worst-case" possibilities and optimistic scenariosshould be compared. Comparative results from scenar-ios are often presented in tables.

A feasibility study report should indicate if theproject design is technically possible. It should alsoshow that the desired technologies could work in coor-dination. In projects with unproven technologies, thiscan be the most important aspect of a study. In projectswith proven technologies, the study can serve to cor-rect design flaws before costly mistakes are imple-mented.

Possible economic outcomes should be a promi-nent part of a feasibility study. Variation in these ele-ments should be included in the scenario analysis.Operating costs and net revenues are factors that showif the project is economically viable. The study shouldcontain pro-forma balance sheets, operating state-

ments, benefit-cost ratios, projected cash flows, andinternal rates of return for the project. These are nor-mally based on a 3-year projection.

The study should include possible project risksfor potential members and other investors; projecttechnology; potential legal and governmental setbacks;management and labor resources; and time-critical fac-tors. Most importantly, the feasibility study shouldenable members to make constructive, informed deci-sions on whether to proceed with, revise, or abandonthe project.

Bankers’ Considerations—A cardinal rule inbanking is to borrow from a lender who understandsyour business; or, conversely, never to lend money ona business project that you do not understand. Eventhough most groups involve their banker early in theprocess, a feasibility study is often conducted with aneye toward explaining the project to potentialfinanciers. Bankers may have different requirementsfrom the study than group members. In many cases,the feasibility study is the formal project presentationto a lender.

Many groups work with bankers with whomthey have an established personal or business relation-ship. This may expedite the process of obtainingfinancing. Nevertheless, the banker must know andunderstand the unique aspects of cooperatives.

Bankers’ primary concerns focus on repayment,the bank’s exposure, and a project’s strengths andweaknesses. Bankers classify these concerns into the"5-C’s":

� Capacity—What is the group’s ability to repaythe loan?

� Capital—What assets are being financed withthe loan and how much is requested?

� Character—Who are the principals of the pro-ject? What is their background?

� Collateral—What is being used to guaranteethe loan? How is it valued? and

� Conditions—What additional factors can affectthe loan?

The odds for financing diminish if a banker can-not understand the basics of the project. The studyshould contain an executive summary and a financialblueprint so the banker can more easily understandthe project. The executive summary should be shortand to the point, but still provide an overview of theproject. The financial blueprint gives information

10

required for calculating project risk and exposure onloans. Figure 7 provides more detail on what these sec-tions should contain.

The feasibility study should present informationthat serves both potential financiers and members.While bankers are potential clients for a study, itshould not be conducted merely to prove to them thata project is viable. However, success or failure hingeson adequate financing. Consult with a banker prior toconducting a feasibility study to determine what fac-tors the banker wants to see developed. This can speedthe time that a bank needs to approve project financingor even improve the possibility of securing financing.

Implementing a Project—During projectdevelopment, it is important to plan ahead to avoidproblems that can occur during implementation. Thegroup should plan ahead even when many currentdecisions need to be made. Implementation is aparticularly critical stage for a project. Although thegroup may feel overwhelmed or exhausted by thisstage, they should not lose sight of the long-termhorizon of the project. Using an implementation plancan assist the group during this tumultuous period.The organizational, legal, and financial matters mustbe well handled from the very beginning. Appendix Dlists issues to consider when implementing a feasibility

study. Not all projects will require every detail listed.Often, the group appoints special committees to

monitor the project progress in specific areas—finance,legal, facilities, and marketing. These committeesbecome the primary ways to report on progress in spe-cific aspects of the project. Members are informed andeducated about the subtleties of the project. This helpsto build project support and understanding of anydelays or cost overruns.

If the project requires construction of a sophisti-cated facility, such as a meatpacking or soybean pro-cessing plant, professionals such as an architectural,engineering, or management specialist will need to beconsulted early in the process. The needed expertisewould be described in the feasibility study. Assistancewill 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 beforethe feasibility study has been completed. This canassist the project development although it consider-ably increases early project development costs.W illiam Patrie, in his "Creating Co-op Fever: A RuralDeveloper’s Guide to Forming Cooperatives" (RBSService Report 54); provides information on this coop-erative structure.

Once the project achieves a certain level of activi-ty, the group hires a manager or project director. This

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Figure 7—Bankers' Considerations for Feasibility Studie

The executive summary should contain:

� Project purpose. What is it and who is involved?

� Repayment capacity. Can the investment to be recovered over a specific 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 Benefits. What is the return on investment and the internal rate of return of the project

The financial blueprint package should contain:

� The assets to be financed.

� What is the project's funding potential and repayment terms? What is the rate of conversion to cash-liquidity?

� What are internal (yields, costs, etc.) and external (inflation, energy, etc.) project risks? What if the key assumptions

are not perfect? What is the group’s risk exposure?

� Evaluate economic consequences. Do net reserves cover capital cost? Does the plan keep the project from capital

erosion?

� What are the projected cash flows, operating statements, and balance sheets? What are the source and use of funds

� Financial commitment of members

� Documentation. What rationale is used to support the assumptions?

person should make the day-to-day decisions for theproject. The board of directors should determine thegeneral guidelines of these decisions. The managermust ensure the work meets specifications, construc-tion proceeds on schedule, and monitor changes ordelays. Obviously, more expensive and technical pro-jects will require a highly skilled manager.

The elected directors or steering committee mem-bers must monitor the project’s progress. While theassistance of committees and managers can be helpful,the group must make the final decisions on the projectguidelines. They have been selected to represent theentire group.

Background Information Sources—Severalsources can guide groups considering a cooperativeproject. Both "How to Start a Cooperative" (RBSCooperative Information Report 7) by Galen Rapp andGerald Ely and "Co-ops 101, An Introduction toCooperatives" (RBS Cooperative Information Report55) by Donald Frederick are good references availablefrom USDA’s Rural Business-Cooperative Service.Another good source is the University of WisconsinCenter for Cooperatives website:http://www.wisc.edu/uwcc. Outside advisors canassist in the development process and provide othersources of background information.

Appendix A

The Feasibility Study vs. the Business PlanGroups often confuse the role of two tools used

in project development—the feasibility study and thebusiness plan. Each has common components.Assuming positive feasibility study results, much of itsinformation is incorporated into the business plan. Italso contains other aspects.

The feasibility study is conducted during thedeliberation phase of project development beforefinancing is secured. It shows if the project concept canbe viable. This analytical tool includes several scenar-ios for the group to use in determining if it continuesthe project. If, after completing a feasibility study, thegroup decides to not proceed, there is no need to createa business plan.

If the group decides to proceed, it prepares abusiness plan for project implementation. The planserves as a blueprint not only for implementation butalso for what actions the group will take during projectoperations. The business plan usually contains lessemphasis on scenarios than the feasibility study.Typically, it elaborates only the scenario selected bythe group as the most promising. The business plan ismuch more focused on what action steps will be takenduring and after project implementation.

The business plan is created after the feasibilitystudy. Project details, which required assumptions forthe feasibility study, have been decided. Standardbusiness plans include details such as key manage-ment personnel, business location, the financial pack-age, product flow, and possible customers.

The feasibility study presents an independentreview of the project, so persons from outside of thegroup normally complete it. In contrast, the group typ-ically develops its business plan internally. The grouprevises the plan with information from bankers andinvestors once the project situation becomes moredefined.

Although this difference is not as important forproject development considerations, the feasibilitystudy is only applicable for the developmental stage ofa project. Businesses continue to use and revise theirbusiness plans after a project has been implemented.As the feasibility study refines the group's initial ideas,the business plan uses information from the study tofurther prepare the project to evolve into an operatingbusiness.

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Appendix C:

Sample Feasibility Outline

A. Executive Summary

B. Table of Contents

C. Summary of the Important Findings andRecommendations:l. Setting, Purpose, and Description of Project2. Market Potential and Source of Production

Supplies3. Technical Features4. Schedules of Net Benefits and CapitalRequirements

5. Benefit-Cost Ratios and Internal Rate ofReturn

6. Project Benefits and Costs7. Proposed Financial Plan and Projected Cash

Flows8. Recommendations for Implementation

D. Description of the Project:l. Nature of the Project (technical processes, gen-eral size and location, what is produced, sup-plies, time horizon, etc.)

2. General Setting of the Project Location.

3. Proposed Ownership, Structure, andManagement

4. Markets to be Served and Existing Suppliers5. Supplies and Competitive Users6. Staffing Requirements and Sources

E. General Setting and Need for Project:l. Physical, Economic, and Social Characteristics(members and community) of the Project Area

2. Regional, National, and InternationalEconomic Relevance to Project

3. Relevant Governmental Policies and Programs4. Description of the Problem Situation (which

would be solved by the project)*5. Impact and Consequences on Members (and

the community if needed)6. Sampling Procedures and Survey Techniques

Used to Support Project

F.Market Potential for Goods or Services, MarketsServed (current and future):l. Form and Quality of Product or Service,Markets Served, and Channels Used

2. Projected Total Demand in Markets to beServed

3. Projected Competitive Supplies and Services4. Sales Potential and Projected Sales Prices5. Marketing Plan and Projected Marketing Costs

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Appendix B:

Sample Feasibility Consultant Selection CriteriaPoints

Awarded

� Previous experience creating feasibilitystudies (0-20) ______� Knowledge of the industry to be studied (0-15) ______� Qualifications of principal researchers or team (0-10) ______� Understanding of the cooperative structure (0-10) ______� Proposed interaction with designated members (0-15) ______� Verbal presentation/communication skills (0-10) ______� Reasonableness of cost (0-15) ______� Miscellaneous intangible (0-5) ______

_____Total Score 100

Adapted from USDA’s RBS Service Report 54, "Creating Co-op Fever: A Rural Developers Guide to FormingCooperatives."

G. Raw Material Supply Potential/Procurement Plan:l. Form and Quality of Materials Required andPotential Supply Sources

2. Projected Total Supply from Members andNon-members

3. Projected Competitive Demand4. Procurement Potential and Projected Prices5. Procurement Plant and Projected Costs6. Form of Commitment of Raw Materials,

Marketing Agreements, etc.

H. Supply of Labor and Other Key Inputs:l. Form and Quality of Labor and Other InputsRequired

2. Projected Total Supply from Sources Planned3. Projected Competitive Demand for Inputs4. Acquisition Plan, Training Program, and

Projected Costs

I. Technical Characteristics and Specifications:l. General Design and Technical Requirements2. Comparing Design and Expected Performance

with Existing Operations3. Reasons for the Advantages of the Design

Selected4. Proposed Sources of Supply and Method of

Acquisition5. Proposed Procedures for Quality Control and

Construction Performance6. Estimated Costs and Sources on Which

Estimates Are Based

J. Development Schedule and Production Plan:l. Citical Points in Sequence of Development andConstruction

2. Detailed Development and ConstructionCalendar

3. Procedures for Controlling DevelopmentSchedule

4. Production Startup and Initial Performance (orYields)

5. Schedule of Transition to Full Production andControls to Ensure that Schedule Will Be Met

6. Development and Production Plan Schedules

K. Capital Requirements and Investment Schedule:l. Estimated Capital Cost for Major Facilities andEquipment

2. Estimated Capital Cost for Marketing andRelated Facilities

3. Replacement Schedules for Equipment andFacilities

4. Estimated Working Capital Requirements5. Schedule of Estimated Total Capital

Investment

L. Sales Plan and Revenue Schedule:l. Seasonal Patterns of Product Demand andPrices

2. Storage Program and Projected Monthly SalesSchedule

3. Projected Net Monthly Product Prices4. Projected Revenue Schedule for the Project

Planning Period5. Pooling Arrangements

M. Projected Operating Costs and Net Revenue:l. Raw Material Costs2. Labor Costs3. Other Supply Costs4. Management and Related Costs5. Repair and Maintenance Costs6. Costs for Research and Development,

Overhead, and Other Service Functions7. Combined Annual Operating Costs8. Projected Net Revenue for the Planning Period

N. Schedule of Net Benefits - Partial Budget:l. Schedule of Added Net Income From Project2. Schedule of Net Revenue Replaced by Project

(if a renovation project)3. Schedule of Combined Total Net Benefits fro m

Project

O. Economic Feasibility of Project:l. Present Value of Investment and Net Benefitsat Alternative Discount Rates

2. Benefit-Cost Ratios and Internal Rate ofReturn for Project

3. Sources and Schedule of Benefits Associatedwith the Project

4. Sources and Schedule of Costs Associated withthe Project

5. Present Value of the Combined Schedules ofAssociated Benefits and Costs

6. Project Potential in Relation to theOpportunity Cost of Capital and Summary ofEconomic Feasibility

7. Sensitivity Tests: What if Prices and Costs Vary8. Other Financial Ratios as Needed

P.Financial Plan for Project:1. Proposed Equity Investment by Source of

Funds

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2. Proposed Sources, Schedule, and Terms ofLoans for Meeting Balance of CapitalRequirements

3. Projected Cash Flow by Sector under ProposedFinancing Plan

4. Projected Schedules of Depreciation, Interestand Taxes

5. Pro-forma Balance Sheets and OperatingStatements (3 years)

6. Pooling Arrangements7. Pro-forma Source and Application of Funds8. Summary of Financial Plan and

Recommendation for Implementation9. Impacts on Members: Impact on the

Cooperative

Q. Appendices and Notes:1. Resume or Credentials of Person or Company

Who Completed the Study2. List Key Assumptions and Validations for

Their Use3. List Footnoted Sources for the Document

(Revised from Internal RBS Staff Papers)

Appendix D:

Feasibility Study and Business PlanImplementation Considerations

I. Fiscal and Legal Responsibilities of Members:A. Incorporate - (if new cooperative)B. Pass bylaws - (if new cooperative)C. Amend bylaws – (if required for an existing

cooperative)D. Provide equity capitalE. Sign marketing agreementsF.Elect directors - (if new cooperative)G. Vote to implement project

II. Legal Actions or Decisions of Board of Directors:A. Proceed with projectB. Select lender and apply for loanC. Establish committees of membersD. Hire managerE. Engage attorneyF.Employ auditorG. Engage architect, project engineer, and/or

general contractorH. Establish bidding proceduresI. Hire consultantsJ. Get clearances from various governmentalagencies to proceed with project

III. Financing:A. Loan closing

1. Sign of documents2. Review special provisions (all loan agree-

ments will include a number of specialprovisions that must be followed. Bothborrower and lender should understandthese covenants.)

3. Line of credit. Drawing of fund schedule4. Repayment terms

B. Bank accounts1. Bonding2. Escrow account3. Keeping lender informed of unusual

events

IV.Legal Matters of Project:A. Loan closingB. Contract biddingC. Preparing or reviewing all contracts with all

contractors working on project

15

D. Helping secure clearances for project zoning,health, EPA, water, sewage, etc.E. Mergers/consolidations

V.Project Manager:A. General manager of cooperativeB. Project architect or engineerC. General contractor

VI. Preparation of Facility:A. Recommendation of the manager

l. Shakedown and trial runsB. Acceptance by the board of directors

l. W arranties2. Escrows

C. Dedication of project

VII. Begin OperationsA. Training employeesB. Monitoring of operation by appropriate engi-

neersC. Changes in operating proceduresD. Full operation

VIII. Evaluation of Project

16

17

U.S. Department of Agriculture

Rural Business–Cooperative Service

Stop 3250

Washington, D.C. 20250-3250

Rural Business–Cooperative 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 benefit 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 USDA’s TARGET Center at

(202) 720-2600 (voice and TDD).

To file 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.