1033511_VitalSteps_finalRev1

VITAL STEPS

Rural Development

Service Report 58

A Cooperative Feasibility Study Guide

Idea

Feasibility Study

Cooperative

Abstract

This guide provides rural residents with information about cooperative

development feasibility studies. It deﬁnes the feasibility study and discusses

their necessity and limitations. First steps in feasibility study development are

described and key actions, including important components of a

comprehensive study, are detailed. Also offered are criteria for selecting and

working with consultants, information for developing assumptions,

and study assessment factors.

Key Words

feasibility study, cooperative development,

consultant, assumption, decision.

Authors

John W. Brockhouse, Jr., and James J. Wadsworth completed the revision of

this guide. The report was ﬁrst authored by James Matson in 2000 while he

was employed with Rural Development. The authors acknowledge revision

contributions from Bruce Pleasant, with USDA Rural Development in

North Carolina, and James Matson, now a private consultant

based in South Carolina.

By John W. Brockhouse, Jr.

and James J. Wadsworth

VITAL STEPS

A Cooperative Feasibility Study Guide

Publications and information are also available on the Internet.

The Cooperative Programs Website is at:

www.rd.usda.gov/programs-services/all-programs/cooperative-programs

First published: December 2010

Revised: August 2016

CONTENTS

The Cooperative Business Development Process .................................................................................................... 4

Deﬁnition of a Feasibility Study.................................................................................................................................... 6

What Is a Feasibility Study?................................................................................................................................................................................. 6

Why Prepare Feasibility Studies? ....................................................................................................................................................................... 6

■ Lender Considerations .....7

■ Feasibility Study Limitations .....8

First Steps in Feasibility Study Development............................................................................................................. 9

Step 1—Decide Whether To Proceed With a Study........................................................................................................................................19

Step 2—Deﬁne the Project ..................................................................................................................................................................................19

Step 3—Group Commitment and Leadership ...................................................................................................................................................10

■ Use of Advisors and Consultants .....11

Step 4—Understand Sound Group Decision-making......................................................................................................................................12

Feasibility Study Key Actions........................................................................................................................................13

1. Deciding Who Will Conduct the Study (Consultant Selection Criteria)....................................................................................................13

■ Feasibility Study Working Relationships .....15

2. Development of Project Assumptions............................................................................................................................................................16

3. Determining Components of the Feasibility Study Report ..........................................................................................................................16

■ Executive Summary .....18

■ Introduction .....18

■ Industry Background .....18

■ Marketing .....18

■ Operational and Technical Characteristics .....20

■ Financial Statements and Projections .....20

■ Summary and Recommendations .....21

■ Appendix .....22

4. Accepting/Rejecting the Study........................................................................................................................................................................22

5. Group Decisions After Accepting the Study .................................................................................................................................................23

Appendices

Appendix A—Sequence of Events in Cooperative Development..................................................................................................................25

Appendix B—The Feasibility Study vs. the Business Plan.............................................................................................................................26

Appendix C—Sample Feasibility Consultant Selection Criteria ....................................................................................................................26

Appendix D—USDA RD Summary Guide for Feasibility Studies Included in Applications for Business & Industry

Loan Guarantees (Instruction 4279-B)......................................................................................................................................27

Appendix E—Sample Pro Forma Cash Flow .....................................................................................................................................................28

Appendix F—Sample Pro Forma Income Statements.....................................................................................................................................30

Appendix G—Sample Pro Forma Balance Sheets...........................................................................................................................................31

Appendix H—Sample Pro Forma Ratio Analysis..............................................................................................................................................32

References and Information Sources................................................................................................................................................................24

Figure 1—The Cooperative Business Development Process ........................................................................................................................15

Figure 2—Guidelines for Group Decisions........................................................................................................................................................12

Figure 3—Key Actions for Feasibility Studies...................................................................................................................................................13

Figure 4—Criteria of a Good Feasibility Study Consultant..............................................................................................................................14

Figure 5—Questions for Developing Assumptions ..........................................................................................................................................17

Figure 6—Example Outline of Feasibility Study Report Components ...........................................................................................................19

COOPERATIVE STATISTICS 2014 3

IN MOST CASES, developing a business is a

complex undertaking that consists of a number of

stages. In cooperative development, following a

step-by-step deliberative process is important

because of the need to review progress and obtain

input from potential members after each step

before making a decision about whether to

proceed with the project. The report “How to

Start a Cooperative” (RBS CIR 7), presents a 12-

step sequence of events recommended for creating

a cooperative business (see Appendix A).

This guide elaborates on the fourth of the 12-

step event sequence: conduct a feasibility study. A

feasibility study is an integral part of cooperative

business development. Conducting a feasibility

study is not a theoretical research project, but

rather is a focused study for a specific group that

wants to explore forming a cooperative business.

Figure 1 condenses the sequence of events of

the cooperative development process into four

stages and shows how the feasibility study fits

within that process. The feasibility study occurs

during the deliberation stage when the focus is on

whether to proceed with a project. (It should be

noted that the steps in Figure 1 are sometimes

approached and completed in a different order

than shown. The specific order of the steps taken

in a development project will be contingent on the

type of venture being explored and the wishes of

those involved.)

The amount of time required in the cooperative

business development process depends on the

complexity of the proposed business and the

attributes of the group involved. Typically, it takes

THE COOPERATIVE BUSINESS DEVELOPMENT PROCESS

1 to 2 years for a cooperative development project

to be completed, although there are some cases

where projects are completed faster and others

that take longer.

The time needed to complete the feasibility

study step varies widely from project to project,

■ Define Project

■ Proceed with study?

4 VITAL STEPS

COOPERATIVE STATISTICS 2014 5

FIGURE 1

THE COOPERATIVE BUSINESS DEVELOPMENT PROCESS*

Identify Economic Need

■ Determine the economic need. Leaders meet to discuss issues and to determine the economic

need that a cooperative might meet.

■ Hold an exploratory meeting. Hold a meeting of potential member-users to decide if interest is

sufficient to support a cooperative.

Deliberate

■ Conduct a member-use analysis and initial market analysis.

■ Conduct a feasibility study.

■ Prepare a business plan.

Implement

■ Employ legal council to draft and complete legal papers.

■ Hold first meeting of the cooperative.

Execute

■ Convene first board of directors meeting.

■ Hold a membership drive.

■ Acquire capital

■ Hire a manager

■ Acquire equipment and facilities, begin operations.

*See Appendix A and CIR 7 “How To Start a Cooperative” for more information on these stages and the individual

steps involved in the entire development process.

again depending on the characteristics of the

group requesting the study, as well as the specific

aspects of the venture, such as technological

complexity, project scale, marketing conditions,

member involvement, and financial planning

factors, etc. However, a good rule of thumb for

the feasibility analysis step for most development

projects is 3 to 6 months.

6 VITAL STEPS

DEFINITION OF A FEASIBILITY STUDY

THIS SECTION CLARIFIES what a feasibility study is by

providing an extensive definition, explaining why studies

are conducted, outlining their limitations, and defining

the process of a feasibility analysis through the

identification of four key factors.

What Is a Feasibility Study?

A feasibility study is an analytical tool used during a

business development process to show how a business

would operate under a set of assumptions. These

assumptions often include such factors as the technology

used (the facilities, equipment, production process, etc.),

financing, (capital needs, volume, cost of goods, wages,

etc.), marketing (prices, competition, etc.), and so on.

The study is usually the first time in a project

development process that many key pieces and

information about the project are assembled into one

overall analysis. The study must show how well all of

these pieces fit and perform together. The result will be

an overall assessment of whether the proposed business

concept is technically and economically feasible.

Feasibility studies should also provide sensitivity analyses

of the business given changes in key assumptions. One

should note that a simulation or projection model, while

useful, is not a substitute for a comprehensive feasibility

study. This type of model is sometimes used in a “pre-

feasibility” study done early in the project timeline to

provide a first-cut evaluation of the proposed business idea.

The feasibility study evaluates the project’s potential

for success. The perceived objectivity of the evaluation is

an important factor in the credibility placed on the study

by potential members, lenders, and other interested

parties. For this reason, it is important to hire a

consultant with no formal ties to equipment

manufacturers or marketers, for example, so that an

unbiased evaluation of operating potential and efficiency

can be made. Also, the creation of the study requires a

strong background both in the financial and technical

aspects of the project. For these reasons, outside

consultants conduct most studies, although the project

leadership normally has input as well.

Feasibility studies for a cooperative are similar to those

for other businesses, with one exception. Potential

members use the feasibility study to evaluate how a

cooperative business idea would enhance their personal

businesses rather than to determine the return on

investment they would receive on invested stock. A study

conducted for an agricultural marketing cooperative, for

example, must address the project’s potential impact on

members’ farming operations in addition to analyzing

economic performance at the cooperative level. In other

cases, such as food cooperatives, the value to the member

is access to consumer goods or services, possibly at lower

prices, and is not based on the economic return to the

cooperative itself. Cooperative businesses are developed

first and foremost to serve members’ needs and enhance

their economic well-being. However, to do so, they must

operate efficiently and compete effectively in the marketplace.

Why Prepare Feasibility Studies?

Developing any new business venture is difficult.

Taking a project from the initial idea through the

operational stage is a complex and time-consuming effort.

Most ideas, whether a potential cooperative or an

investor-owned business, do not develop into an

operational entity. When ideas do make it to the

operational stage there is a high failure rate (many within

the first 6 months). Thus, before potential members

invest in a proposed business project, they must

determine if it can be economically viable and then they

must decide if investment advantages outweigh the risks

involved—a feasibility study is the means by which these

decisions are made. Without feasibility studies the

percentage of startups that fail would be higher.

Many cooperative business development projects are

fairly expensive undertakings that can also be confusing

to potential members. Proposed cooperatives often

involve operations that substantially differ from those of

the members’ individual businesses, and cooperative

operations may involve risks with which the members are

unfamiliar—another reason that a feasibility study is so

important. It should provide a clear understanding of

project risk to help members decide whether to invest in

the proposed business.

COOPERATIVE FEASIBILITY STUDY GUIDE 7

Members participate in the development of the

feasibility study and thus are educated about various

aspects of the project, which will help them decide

whether to move to the implementation stage. In

addition, this knowledge helps prepare members of the

steering committee to become the board of directors, as

often happens if the project is implemented.

While the costs of conducting a study may seem high

to the potential members, they are relatively minor when

compared with the total project investment that will be

required. The expenditure for a feasibility study is

actually inconsequential if it saves an unprofitable venture

from going forward, thus preventing the larger capital

investment needed to start most new businesses, as well as

the time and effort involved, from taking place. And if the

■ Define Project

■ Proceed with study?

study shows that a project is indeed feasible, it provides

the group with some concrete useful data that can be used

in subsequent business plans and projections.

Feasibility studies are useful and valid for many kinds

of business development projects. Evaluation of whether

to start a new business, by either new groups or

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 decision-

makers 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 implementation is

made. Potential stumbling blocks can be identified and

decisions made about whether they could be effectively

addressed if the project goes forward.

Applying the knowledge gained from a feasibility study

can significantly lower overall project costs by keeping

adverse designs and planning concepts from being made.

A feasibility study presents and clarifies the risks and

returns associated with the project so that prospective

members can evaluate them. There is no “magic number”

or correct rate of return a proposed cooperative needs to

obtain before a group decides to proceed. The acceptable

level of return and appropriate risk rate will vary for

individual members depending on their respective

personal situations and need for the proposed services of

the cooperative.

Lender Considerations

A proposed project usually requires both risk capital

from members and debt capital from banks and/or other

financiers to become operational. Lenders typically

require an objective evaluation of a project when they

consider a loan investment, and a feasibility study often

provides the first look at those aspects.

While some groups often try to involve a lender early

in the process, a feasibility study is often conducted with

an eye toward explaining the project to potential

financiers. Lenders have different requirements from the

study than group members. Lenders are most interested

in the project’s ability to pay back loans while group

members are interested in the benefits to them of using

the cooperative.

Attain Group Commitment ■

Appoint Leaders ■

8 VITAL STEPS

Many groups work with lenders with whom they have

an established personal or business relationship. This may

expedite the process of obtaining financing. Nevertheless,

the lender must know and understand the unique aspects

of cooperatives and fully understand the characteristics

and potential of a proposed project. The feasibility study

will help them in this regard.

Lenders’ primary concerns focus on repayment, their

risk exposure, and a project’s strengths and weaknesses.

Lenders classify these concerns into the “5-C’s”:

• Capacity—what is the group’s ability to repay the

loan?

• Capital—what assets are being financed with the

loan and how much is requested?

• Character—who are the principals of the project?

What is their background?

• Collateral—what is being used to secure the loan?

How is it valued?

• Conditions—what additional factors can affect the

loan?

The odds for financing diminish if a lender does not

fully understand the project and is unable to review the

potential financial results through a sound economic and

financial analysis. Success or failure of a business

opportunity often hinges on obtaining adequate lender

financing. For this reason, it is often a good strategy, if

possible, to consult with potential lenders prior to

conducting a feasibility study to determine what factors

they will focus on given the type of project. Such a

consultation can shorten the time that a lender needs to

approve project financing, or even improve the ability of

securing financing. However, while a feasibility study is

important for providing information that will help in

gaining finances from a lender, it should not be

conducted merely to prove to them that a project is

viable. It must only be undertaken when the proposed

project is being seriously considered for implementation

by dedicated potential members.

Feasibility Study Limitations

Although a feasibility study is a useful tool for project

deliberation, it has limitations. A feasibility study is not

an academic or research paper, but is a pragmatic

information and data analysis document. It is confidential

to the group for which it is conducted, and is not for

public dissemination. A completed study should permit a

group to make better decisions about the strategic issues

of its specific project.

The study is also not a business plan, which is

developed later in the project development process and

functions as a blueprint for a group’s business operations

for implementation (see Appendix B).

Given a group’s decision to proceed after evaluating a

feasibility study’s results, the business plan presents the

group’s intended responses to the critical issues raised in

the study. Many of the outcomes presented in the

feasibility study form the basis for developing a business

plan if a decision to proceed is made.

A feasibility 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 study may

invalidate certain ideas that are part of the original vision.

Assumptions that are partially developed from these

ideas provide the basis for the feasibility study, so the

more realistic they are, the more value the study’s

findings will have for a group’s decision-making.

A study should not be conducted as a forum merely to

support a desire that a project be successful. Rather, it

should be an objective evaluation of a project’s chance for

success. Even studies with negative conclusions are useful

for group decisions.

As stated earlier, financiers may require a feasibility

study before providing loans, but this should not be a

study’s only purpose. Although a study can enhance a

banker’s ability to evaluate a project, the primary goal

should be to aid a group’s ultimate decision on going

forward, not only whether financing can be secured.

A feasibility study will not determine if the project will

be initiated, since that depends on the potential members,

who will invest in and become the owners of the business.

However, the information, data, and facts offered in a

study, given realistic assumptions, provide the basis for a

decision. Potential members must decide if the benefits

justify the risks involved in their continuing the project

and the study findings will assist them in that assessment.

A study uses basic project assumptions to develop an

analysis, 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 to assist it in making

decisions. This should lower the risk of continuing with a

business development project that ultimately would fail.

COOPERATIVE FEASIBILITY STUDY GUIDE 9

SOME INITIAL STEPS must take place as a group pro-

gresses toward fully assessing a project. First, the group

must decide on whether to proceed with a feasibility

study. Second, the project must be accurately defined.

Third, there must be strong commitment and leadership

from the group, and fourth, those involved must fully

understand the process of making sound decisions.

Step 1

Decide Whether To Proceed with a Study

The first step for a group to take is to fully deliberate

the necessity of even conducting a feasibility study. The

group must carefully consider whether it is ready and

prepared to have a study conducted.

Because a group’s resources are likely limited, it is

important that the group be ready to proceed with the

project and the feasibility study before allocating the

necessary resources. It could very well be that the study

needs to be put off until another time because of a lack of

support from prospective members, not enough capital to

proceed, or any other given reason. Once the decision is

made to invest the time and resources in a feasibility

study, the group proceeds to define the project.

Step 2

Deﬁne the Project

In a successful cooperative development project, a core

group of people must feel a strong need to work together

to solve a problem or take advantage of a business

opportunity. Working together provides the context for a

cooperative business project. What the project will entail

must be understood and the group must believe the idea

is worth pursuing. Often, a few individuals provide the

spark for an idea, but group interaction permits them to

hone an idea and develop sufficient interest. When

defining a project early on, a group often discovers

common interests that a potential cooperative business

may be able to address.

Cooperative businesses 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, potential member interest exists, and benefits are

possible, then a cooperative can be the solution.

To clearly define a development project, a number of

factors should be included in spelling out the project idea.

The project idea should be:

• Leaders and other potential member-users identify

the economic need the cooperative might fulfill.

• Understandable (described in such a way that the

objective is clear);

• Significant enough to warrant group action;

• Capable of providing economic and/or technical

solutions to a problem or opportunity;

• Economically and socially fitting for a group; and

• Considered a reasonable business solution.

When all these elements exist in a project idea, the

potential exists for developing a successful cooperative. If

any are lacking, the concept should be rethought and the

project definition revised before proceeding with the

feasibility study steps.

A carefully defined project idea will provide the

steering committee and group with a foundation from

which to judge the project as it proceeds.

Here is an example of a project idea statement: A

member-owned cooperative that will process and market

members’ soybeans for the farmers of “ABC valley,” to

meet the area’s high demand for soybean meal and

soybean byproducts, and to provide strong value-added

economic benefits to members.

The group then may provide some key points in

addition to an idea statement to further clarify how the

project will meet necessary economic, business, and

technical factors.

FIRST STEPS IN FEASIBILITY STUDY DEVELOPMENT

10 VITAL STEPS

Step 3

Group Commitment and Leadership

For a cooperative development project to have a

chance at success, it must have individuals involved who

are committed to the defined idea. A critical mass of

potential members should be involved because having

sufficient support for a proposed concept is crucial. The

specific number for a critical mass will of course depend

on the type of products involved, the scope of what the

business will do, and the economic resources that will be

needed. A smaller number of individuals who are fully

committed to a project, provided they have sufficient

product, capital, or demand for services, can have a

higher chance of success than a larger number who are

only partially committed.

Thus, the key is not necessarily the number of people

involved, it’s the level of commitment they have. This is

especially true for cooperatives, since the members

themselves must use the products or services for the

cooperative to succeed.

Although when a development project is a complex

endeavor that will involve a highly technical processing

plant (for example, an ethanol or biofuel processor, or a

meat plant or grain mill), then having a larger number of

committed people becomes very important.

Clearly, commitment and loyalty to an idea cannot be

overstated. It can be measured several ways, such as

attendance at organizational meetings, positive potential

member survey results, the amount of willingness to

become involved and personally invested in a project, and

financial backing when requested.

Financial support from potential members is perhaps

the best measure of support. For instance, are people

willing at the start to contribute to finance all or part of a

feasibility study? Asking potential members for an initial

contribution can help sort out those who are serious

about the effort from those who are not.

The second step in the events for starting a

cooperative outlined in Appendix A indicates that a

steering committee of potential members should be

formed from a group for guiding the project. A steering

committee represents the larger group and takes the

major leadership role in the project.

Groups need people who are leaders to assume control

of a project and to be part of the steering committee. An

important prerequisite is that they be willing to join the

proposed cooperative and commit to financing it and

using its services. Chosen or volunteered leaders must be

people that will be active participants in the development

process as they will ultimately be responsible for making

key decisions and plotting the project’s direction within

the steering committee.

The steering committee must also ensure that all

potential members involved feel free to voice their

opinions and viewpoints about a project. Different

perspectives are important considerations for developing

a new business, and if alternative strategies or options are

suggested and deemed important to evaluate, they should

be brought into play during the feasibility study process

so they can be properly assessed.

■ Define Project

■ Proceed with study?

Attain Group Commitment ■

Appoint Leaders ■

■ Hire Consultant

■ Determine Study Components

COOPERATIVE FEASIBILITY STUDY GUIDE 11

In USDA’s Cooperative Service Report 54, “Creating

‘Co-op Fever’: A Rural Developer’s Guide to Creating

Cooperatives” (see references or http://www.rurdev.

usda.gov/rbs/pub/sr54/sr54.htm), author Bill Patrie

mentions the following five characteristics of a “project

champion” who provides strong leadership:

1. Credibility

2. Financial stability

3. Basic knowledge of the industry

4. Willingness to accept the servant leadership role

5. A developer, not a promoter

Patrie defines these five characteristics (verbatim)

as follows:

❶ Credibility—Is the individual personally credible in

his/her neighborhood? They need not be the biggest

farmer or the most active in commodity associations, but

they must be respected for their judgment. Avoid

individuals who have tried every new idea that has come

around and are suckers for anything new. I look for

people who finish what they start and can take a long-

term view.

❷ Financial Stability—Is the individual capable of

keeping his/her house in order? Producers who have

failed before (especially if they have gone through

personal bankruptcy) usually lack the credibility with

other producers and lenders to lead the project. They

must be able to devote time away from their personal

business to help develop the cooperative. This criterion is

extremely limiting because many producers lack the time

it takes to do the work without jeopardizing their

individual operations. I once worked with a cooperative

whose interim board chair wanted to use organizational

funds to buy clothes. Her argument was that she would

make a better impression on investors if she could afford

to dress well.

❸ Basic Knowledge of the Industry—Is the individual

familiar with the industry in a comprehensive way? Most

value-added cooperatives are also vertically integrated.

The project champion must have a basic understanding of

the entire industry—from the first steps of production

through processing to marketing to the final consumer.

This is a tall order and can’t be easily filled. The

“Madison Principles”

are critical at this stage of

leadership selection.

Often, producers become enamored of a

manufacturing technology or an available building and

want to quickly close the deal to own the facility or the

equipment. A true project champion must lead the group

through a market analysis prior to analyzing processing

facility and equipment needs. If an individual can’t be

found who has this basic understanding of the industry,

then I look for a person who is willing to learn.

❹ Willingness To Accept the Servant Leadership

Role—The project champion is often uncompensated.

They will frequently be criticized, often unfairly, and

sometimes insulted. Thin-skinned or quick-tempered

people often do not last in the pressure-cooker environ-

ment of creating a new cooperative enterprise. I look for

a project champion who has balance in her/his life. They

must have patience, people skills, a good sense of humor,

and a sense of what is ridiculous.

❺ A Developer, Not a Promoter—This is development

work, not promotion. Promotion may get column inches

in the local paper and a 30-second spot on the 6 o’clock

news, but it won’t build a financially viable company.

While enthusiasm is important, it can’t replace critical

common sense and solid business judgment.

These five attributes are important in a “project

champion” or leader of a cooperative development project.

Use of Advisors and Consultants

Outside advisors and consultants can be useful to a

group during the business formation process. However,

outsiders, no matter how well intentioned, should not be

put into overall leadership positions. If they are, the

process often becomes more “top down” directed rather

than internally directed by prospective members, and in

this case, potential conflicts may arise and the focus of the

group’s vision may be skewed.

At the same time, a group should feel free to seek

outside experienced consultants to help guide it through

The “Madison Principles” are 12 principles for cooperative development practitioners to follow. They were developed by the members of Cooperation

Works! in Madison, Wisconsin, in 1985. See http://www.cooperationworks.coop/about/madison-principles.

12 VITAL STEPS

the development process, or perhaps to aid just a specific

aspect of the process. For example, extension agents or

lenders that interact closely with a group may be willing

to help; accountants and lawyers may provide assistance

in specific areas such as bookkeeping, legal structure, and

drawing up legal documents; and advisors, such as USDA

cooperative development specialists or development

practitioners from a cooperative development center, can

help the group with all or some aspects of the

development process, and may even provide direct

technical assistance with feasibility studies or business plans.

Outside consultants are useful because of their

experience and expertise with the development process

and because they also work in an objective manner to

ensure that all potential members’ ideas, thoughts, and

concerns are considered and that assumptions and

information are accurate and realistic. (See the

“Feasibility Study Key Actions” chapter for more

information on choosing a consultant.)

Step 4

Understand Sound Group Decision-making

As stated above, strong and committed leaders are

essential for defining a project and deciding if a feasibility

study should be conducted. Informed leadership with

enlightened self-interest and a commitment to group

action is needed. Leaders must maintain a strong focus on

the decisions to be made and be able to create an

environment where participants are encouraged to be

active and involved in discussions, creativity, and

decision-making.

For a project to succeed, all potential members of a

new cooperative business venture must be kept informed

about project details as they evolve so that they buy into

and feel committed to the project.

To assist with decision-making, those on a steering

committee should ask two questions: (1) If a bad decision

is made, what would be the cost? and (2) If no decision is

made, what would be the cost? If the cost of making a

wrong decision is relatively small, do not spend much

time, money, or effort on the decisionmaking process. On

the other hand, if the cost of committing an error could

be large, it’s better to put more resources into

determining the pros and cons of the decision and

defining all of the issues before choosing an option.

In practice, this is not always easy to implement given

the different personalities involved and the personal

preferences for making decisions. Some may be slower to

learn, need more time to contemplate before making a

decision, or have aversions to high risk. On the other

hand, some members may want to go ahead and make a

decision before relevant information has been gathered

and fully assessed. Balancing diverse aspects within a

group can be difficult, but working to do so is paramount.

Thus, decision-making often is one of the greatest

initial challenges that a group faces in developing a

project. Figure 2 presents some guidelines to assist

groups with the decision-making process. Given the

difficulty in making decisions, some groups or individuals

try to avoid it. There is always more information that can

be gathered, but there is also a cost to taking more time

to deliberate. A decision must be made when further

investigation costs more than new information is worth.

FIGURE 2

GUIDELINES FOR GROUP DECISIONS

■ Unanimous agreement is not required to move forward; a consensus approach is better.

■ Never decide to proceed based solely on negative reactions, such as resentment or envy toward

middlemen, lenders, etc.

■ A few reliable persons are superior to a larger number of doubtful persons.

■ Base decision-making on economic and social realities faced by the cooperative.

■ Make each decision only once.

COOPERATIVE FEASIBILITY STUDY GUIDE 13

Once a steering committee and group have made the

decision to proceed with a feasibility study, there are a

number of key actions that need to be taken.

Figure 3 provides, in chronological order, the actions or

decisions that have to be made. The key actions for a

feasibility study include: deciding who will conduct the

study, development of project assumptions, determining

which components (study areas) will be included to make

the study comprehensive, accepting or rejecting the

completed study, and group decisions after accepting the

study.

❶ Deciding Who Will Conduct the Study (Consultant

Selection Criteria)

Although in principle it is possible for a project group

member to conduct the feasibility study, normally, an

outside consultant is hired to do it. Most prospective

members and financiers view an objective evaluation of a

project concept via an outside practitioner as important.

This objectivity often provides a group with helpful

information that might have been overlooked by one who

is participating directly in the project.

Hiring a consultant to create a feasibility study is an

important decision, and thus the steering committee or

group must use care when selecting that person (or firm).

In practice, consultants have differing levels of ability and

usually a consultant will be strong on some points and

weaker on others. The key is to select a feasibility

practitioner who is skilled in cooperative development

and versed in areas relevant to the type of project.

Figure 4 provides possible criteria to use for selecting a

qualified consultant. The steering committee will need to

determine if a consultant is technically proficient enough

to undertake a feasibility study and whether he or she has

significant experience in doing so. The committee should

review samples of previously prepared studies and speak

with others for whom the person or firm has worked

before contracting with them. It is important that a

consultant have the traits required to work well within

group situations.

Consultants should have experience in the industry

under study. Otherwise they may not correctly identify

critical factors. Given business complexity, it is almost

impossible for one person to have experience in all areas.

Some consulting firms resolve this issue by having their

feasibility specialist work with contracted industry

experts. In any case, it is important to research many

sources for all the pertinent information possible about

an industry.

A team approach may, in some instances, be utilized to

develop a study. For example, a cooperative development

specialist could work jointly with industry specialists to

create a feasibility study.

The consultant should also understand the unique

aspects of cooperatives. Tax implications, distribution of

net margins (profits), management, and other business

considerations (e.g., governance) of cooperatives differ

from those of other businesses and the nuances of each

must be properly presented.

The consultant should avoid preconceived notions

about how the project will function. The study should not

be an “off-the-shelf” document assembled from

previously created studies. Rather, the consultant should

pay particular attention to the ideas that the group has

developed and craft a unique study suited to the group’s

needs. The consultant should work closely with the group

and be receptive to its suggestions. Also, the consultant

should be prepared to make technical revisions or to

FEASIBILITY STUDY KEY ACTIONS

FIGURE 3

KEY ACTIONS FOR FEASIBILITY STUDIES

1. Deciding who will conduct the study.

2. Development of project assumptions.

3. Determining components for a comprehensive

study.

4. Accepting/rejecting the study.

5. Group decisions after accepting the study.

14 VITAL STEPS

correct errors given group recommendations and wishes.

Revisions are a normal part of the study development

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 results

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’

desires for a project’s viability.

Timeliness is an important consideration when

selecting a consultant. Projects are time sensitive. Usually,

decisions to proceed await information provided in the

feasibility study. So care and diligence required for a well-

crafted study must be balanced against the desire for

speed. A qualified consultant must be able to complete a

well-designed study within a timeframe that serves the

group’s needs. On the other hand, the timeline must be

realistic. And, a consultant can only progress as fast as a

group makes the required decisions, provides information

to the consultant, and carries out its other project

responsibilities.

Cost is an important factor. The expertise and skills

that consultants offer a project must be weighed against

their cost. A quicker timeline could increase a consultant’s

fee. Preparing a pre-feasibility analysis may decrease the

effort required to complete the feasibility study and

reduce the cost.

Some public programs offered by the USDA’s Rural

Business-Cooperative Service, community development

offices, the Small Business Administration, some

cooperative development centers, and local business

incubator programs provide technical assistance at little

or no cost to groups creating feasibility studies. There are

also grant programs available such as USDA’s Value-

Added Producer Grants program, which can provide

funding for a feasibility study if a project meets the

program’s criteria and is selected. This program requires

a one-to-one matching contribution from the applicant.

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 increase the

cost of a feasibility study, access to the actual data permits

the group to use the information for later needs with

greater flexibility. The group shouldn’t, however, expect

the consultant to continually revise the study after it has

been finalized. This data can also reduce the cost of

creating the business plan, if the group proceeds to that

stage. Additionally, it can decrease the effort required for

revisions, if in the future the group changes the project’s

FIGURE 4

CRITERIA OF A GOOD FEASIBILITY STUDY CONSULTANT

■ Has previous experience conducting feasibility studies.

■ Has experience with the industry to be studied, or access to experience and associated professionals.

■ Works independently and objectively (e.g., of equipment manufacturers, marketers, etc.).

■ Understands cooperatives fully (their operations, governance, financial workings, etc.).

■ Is willing to listen to the groups’ ideas.

■ Works closely with designated contact members of the steering committee or group.

■ Is willing to revise study given feedback.

■ Accomplishes the study within an agreed upon timeline.

■ Works within the group’s designated budget.

■ Is a strong writer with skills in data analysis and spreadsheet design and presentation.

■ Provides clear, useful information in the completed study.

COOPERATIVE FEASIBILITY STUDY GUIDE 15

assumptions to differ from those in the study.

Once the consultant has been selected, the group

should provide detailed instructions on the study

requirements. There should be a legally binding contract

between the parties. The group should consult legal

counsel for assistance. The contract should state clearly

the requirements and role 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

downpayment 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.

A complex, large-scale project may require several

consultants to complete various aspects of the study.

Multiple consultants can reduce the group’s dependency

on a single person or company. It also can permit the

group to select experts from several fields. However, it

also can complicate the coordination and consistency of

the information received.

Before signing the contract, the group should discuss

with the consultant arrangements for cost overruns, 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. All parties should be

clear about what to expect prior to signing the contract

and initiating the study. (See Appendix C for a point-

award system for selecting a consultant based on select

criteria.)

Feasibility Study Working Relationships

A few qualified members of the steering committee (if

the committee is a large one), or the entire steering

committee (if it is a small one) should be designated to

work closely with the consultant or person developing the

study. These group members must see that the feasibility

study properly presents and reflects the right aspects of

the project as it has been designed, and in accordance to

the defined assumptions. Through this working

relationship the study should be tracked through all of its

stages and its ideas reviewed and clarified.

Steering committee members with appropriate

backgrounds and the ability to commit sufficient time to

working with the consultant should be selected. These

contact members represent the group’s interests to the

consultant. They are the contact to provide clarification

and additional information that the consultant may

require. Plus, they should provide periodic reports to the

group about the study’s 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 entire

group and not just their own views.

Members or outside financiers will often perceive the

reliability of the entire study based on its least accurate

piece. An otherwise well-conducted feasibility study could

■ Define Project

■ Proceed with study?

Attain Group Commitment ■

Appoint Leaders ■

■ Hire Consultant

■ Determine Study Components

Marketing ■

Industry Background ■

Financial Projection ■

16 VITAL STEPS

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

consistency—is the language appropriate; is the

document well organized; and can someone who is not

familiar with the project understand the study and its

findings? Reviewers should confirm that the study’s

assumptions are clearly documented, well described,

justified, and as accurate as possible.

Although the contact members take the lead in

working with the consultant, others should review the

study carefully before the group decides to accept it.

Advisors such as USDA 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 group has used consultants to prepare the

report. Often, a series of draft reports are presented to

the group as the study proceeds. Issues identified that

warrant changes to the study are then conveyed to the

consultant.

❷ Development of Project Assumptions

Key project assumptions should be determined at the

initiation of a feasibility study. Usually an assumption is

thought of as something that is taken for granted, but in

the current context assumptions provide the basis for the

project and therefore need to be carefully thought out

and developed. Since the group cannot analyze every

variation of a project, it must provide boundaries within

which the study will be carried out. The consultant, if one

is being used, can assist in the development of

assumptions by providing objective knowledge and

expertise. He/she should also ask the group difficult

questions to narrow the range of assumptions and make

sure they are as accurate as possible, as well as justifiable.

Figure 5 provides four questions and some clarifying

statements that a steering committee or group should

address as it develops assumptions for the feasibility

study.

The steering committee or group may not be able to

provide all of the required detail for each of the

assumptions that need to be developed, so again, using an

experienced practitioner/consultant to help research and

develop some of the assumptions may be necessary.

Furthermore, some of the assumptions will have more

than one option to study. That’s where sensitivity analysis

will come into play. Other questions that help determine

proper assumptions might arise as well, depending on the

type of project. It is up to the steering committee and

those conducting the study to explore all avenues when

determining the assumptions needed for a full analysis in

a study.

Considering more than one potential business

structure and/or alternative business process is not a

problem at this stage. However, it is important that an

analysis be conducted in the feasibility study for each

identified project scenario so that the steering committee

or group can assess them.

❸ Determining Components of the Feasibility

Study Report

A comprehensive feasibility study will contain all the

ingredients necessary for the steering committee and

group to make a sound decision on whether to proceed

with a project. Although studies vary depending on the

type and scope of the proposed business, all reports must

contain enough elements to present a comprehensive

view of the project. While some specific project details

may be undecided, such as plant location or who the

manager will be, a report must contain enough

information and analyses to determine a project’s

potential for success or failure.

The feasibility study report serves as the written

representation of the group and its potential cooperative

business. Potential members, financiers, and others will

use this document to help determine their level of

support for the project. The report’s appearance as well as

its content can influence people’s perception of it. Thus,

the layout should be professional, well organized, and

well written.

The appearance of and specific aspects included in the

report will vary depending on the project, the group, and

the consultant who prepares the study. Thus, there is no

required length or number of components for a study

report, but the study must provide an organized format

with enough critical information and analyses pertinent

to the project to help the group make an insightful

decision.

Key elements will change depending on the nature of

Appendix D provides the USDA Rural Development summary guide for what a feasibility study should contain for a business applying for USDA Business

and Industry guaranteed loans (note that the criteria in the guide can be incorporated into a feasibility study).

COOPERATIVE FEASIBILITY STUDY GUIDE 17

each project. As a rule of thumb, if reasonable changes in

a factor could make the project change from successful to

unsuccessful, it is a key element.

Examples could be the technology of production,

volume of inputs, the market for goods sold, marketing

channel, personnel costs, prices paid, and capital costs.

Figure 6 provides a general example outline of the major

components a feasibility study might contain. This

FIGURE 5

QUESTIONS FOR DEVELOPING ASSUMPTIONS

➀ How/why is the proposed cooperative needed (as determined by the potential members)?

■ Define the assumed products and/or services to be handled or provided (there can be more than

one and each should be clearly defined).

■ Explain the proposed cooperative’s comparative advantage (e.g., define what the market is

demanding and what producers do well).

■ Describe the proposed cooperative's benefit to members (e.g., enhanced marketing, higher

marketing prices, lower prices for products purchased, more efficient and lower cost services, etc.).

➁ What is the potential membership base and volume of product for the project? (This data is normally

gathered via a survey of potential members.)

■ Define the level of potential support by producers who would have the opportunity to participate.

■ Describe the approximate number and size of the producers who are likely willing to participate.

■ Define the potential volume of products or services.

■ Explain the potential for future expansion of membership and volume.

➂ How well will the cooperative fit into the market?

■ Define the projected prices for both inputs and outputs.

■ Define the projected volume of sales.

■ Explain the size of the market and how the cooperative fits in (e.g., market share).

■ Determine the potential for strategic alliances.

➃ What are the financial and organizational needs for the project?

■ Estimate overall capital needs and describe potential sources of this capital.

■ Define the level of financing needed and potential lenders.

■ Describe the legal requirements, documents or agreements, permits, and inspections.

■ Describe the facilities and equipment needed and whether they will be purchased, built, or leased,

and estimate how much they will cost.

■ Estimate the management requirements and skills, and the cost of obtaining the appropriate

management.

18 VITAL STEPS

example includes eight major components, but the exact

number and order of components for different studies

could very well vary from these. In addition to the

potential items listed in the outline below or others

determined given the project, a study should include a

title page, the name of the person(s)/firm who conducted

the study, and a table of contents.

General descriptions of each of the sample

components included in Figure 6 are described in the

following sections (sections include relevant outline items).

XECUTIVE SUMMARY

I. Executive Summary

A. Summary of the Important Findings and

Recommendations

It is important to have a concise summary of the

critical segments of the report in an executive summary at

the front of the report. This will allow reviewers to gain a

strong sense of the report’s significant information and

major findings before they proceed with reading the

entire study. Each major part of the report should be

briefly and clearly summarized. When applicable to the

major findings and final conclusions, significant data

reflecting concrete analysis should be provided, and a

summary of the key recommendations listed. This

segment of the report should provide a context from

which the reader will be able to better decipher all the

components and findings of the report.

As a means of setting the foundation for the study, it is

important to also identify the steps completed for the

project up to the current point in time, and the names of

those heavily involved (the steering committee members

at least).

NTRODUCTION

II. Introduction—Project Description and Justification

A. Description of the project

B. General setting and need for project

C. Work already completed, pertinent dates, and

those involved in the project

This section is usually somewhat brief and simply

introduces the cooperative project and provides some

justification for its need. Information as to when the

project process began and in what stage it is now should

be offered. In general, size and scope of the project,

membership aspects, methodology employed for data

collection, marketing and economic conditions,

competition, relevant technical factors, economic and

community conditions, etc., can all be briefly introduced

to provide the reviewer/reader with an overall general

conception of what the cooperative project entails.

NDUSTRY BACKGROUND

III. Industry Background

A. Basic background information on the industry

B. Economic conditions of the industry

C. Implications and feasibility of entering industry

The state and status of the industry within which the

cooperative will operate should be described in as much

detail as possible and be broken down into geographic

applicability (i.e., foreign, domestic, regional, local) to the

project. The study should include charts and graphs of

industry trends (e.g., volume, prices, byproducts, etc.), as

well as a complete assessment of the competitive

environment to properly define the need or fit of the

cooperative within the industry sector. Pertinent data

from industry organizations is helpful if it can be acquired.

Government regulations and policies within the

industry in question should be fleshed out and their

relevance to the proposed business explained. Any

regulations that might need to be met (e.g.,

environmental impact assessments, permits, etc.) should

be clarified and analyzed. Costs associated with the

government regulations and policies of an industry will

need to be documented for the financial projections section.

ARKETING

IV. Marketing

A. Market potential for goods to be handled or

services to be provided

B. Markets to be served (current and future) and

their attributes

C. Ease or limitations of entering the market

D. Marketing plan (strategies to be followed,

associated costs, summary of key actions)

E. Overall assessment of the marketing situation

and plan

COOPERATIVE FEASIBILITY STUDY GUIDE 19

FIGURE 6 EXAMPLE OUTLINE OF FEASIBILITY STUDY REPORT COMPONENTS

IIIII. E

XECUTIVE SUMMARY

A. Summary of the Important Findings and Recommendations

IIIII. I

NTRODUCTION—Project Description and Justification

A. Description of the project

B. General setting and need for project

C. Work already completed, pertinent dates, and those involved in the project

IIIII. I

NDUSTRY BACKGROUND

A. Basic background information on the industry

B. Economic conditions of the industry

C. Implications and feasibility of entering industry

IIIV. M

ARKETING

A. Market potential for goods or services to be handled

B. Markets to be served (current and future) and their attributes

C. Ease or limitations of entering the market

D. Marketing plan (strategies to be followed, summary of key actions)

E. Overall assessment of the marketing situation and plan

IIIV. O

PERATIONAL AND TECHNICAL CHARACTERISTICS

A. Supply of labor and its quality (including management)

B. Supply of key inputs needed for operations

B. Technical characteristics and specifications of required plant and equipment

C. Assessment of potential operational capacity and efficiency

D. Location considerations (if one has not been already selected) and assessment (if one has been selected)

IIVI. F

INANCIAL STATEMENTS AND PROJECTIONS (pro forma statements)

A. Projected revenues, operating costs, and net income

B. Capital requirements, potential and actual sources of equity, accumulation schedule, investment schedule

(plant, equipment, human resources, etc.)

C. Pro forma cash flow statement

D. Income, balance sheet, and sources and uses of funds statements

E. Equity accumulation plan and financial ratio analysis

F. Financial plan summary (description of how it will all fit together)

IVII. S

UMMARY AND RECOMMENDATIONS

A. Concise Summarization of the Major Findings

B. Recommendations and Concluding Comments

C. Development schedule (remaining key steps and accompanying dates for action)

VIII. A

PPENDIX

A. Appendices (additional spreadsheets)

B. Important supplemental information

C. Notes, credentials, and references

20 VITAL STEPS

Various components of the project’s proposed

marketing plan, whether for products to be marketed or

goods to be sold, need to described and analyzed. The

marketing environment should be fully described. The

description should include how the product or products

will be introduced and channeled into available markets.

A description of potential customers, processors,

handlers, etc. should also be provided.

Procurement and sales strategies for commodities or

goods to be purchased and/or sold should be described.

This section should address market demand implications,

marketing costs, transportation issues, coordination with

others in the market chain (e.g., brokers, venders,

manufacturers, processors, pooling, etc.), the quality and

form of the products to be marketed, and an overall

strategic assessment of marketing the product or

products. When applicable, information from market

outlook reports (e.g., USDA and other government

agencies) that provide forecasts on specific crops,

products, and industries are helpful for providing a

context for the marketing plan.

Relevant charts, graphs, and tables should be provided

to present a clear picture of the marketing environment.

If it’s a value-added venture, the implications of

marketing the resulting products should be defined. How

those products fit into existing markets given

competitors’ similar products should be researched and

reported. From the overall marketing analysis, an

assessment of the feasibility of the proposed marketing

plan should be included.

PERATIONAL AND TECHNICAL CHARACTERISTICS

V. Operational and Technical Characteristics

A. Supply of labor and its quality (including

management)

B. Supply and costs of key inputs needed for

operations

C. Technical characteristics and specifications of

required plant and equipment

D. Assessment of potential operational capacity and

efficiency

E. Location considerations (if one has not been

already selected) and assessment (if one has been

selected)

This section lays out the operational aspects and

procedures of the proposed business including: the supply

of labor and its quality; which key inputs will be required

(raw materials such as soybeans or wheat, for example),

their source (supported by a survey of potential members,

if applicable) and their cost; the technical characteristics

(e.g., the type of plant design required, equipment,

facilities, building systems, etc.); the feasibility of finding

proper management; location aspects; and operational

issues or options; etc. The study should address the

ability of the project to operate efficiently within the

scope of the project’s parameters.

It is important to provide information on the technical

aspects of the project and to show how the proposed

technologies will work within the context of the entire

project. In projects with unproven technologies, this can

be the most important aspect of a study and it provides a

basis for close assessment. In projects with proven

technologies, the study can serve to correct design flaws

before costly mistakes are implemented.

If the project requires construction of a sophisticated

facility, such as a meatpacking or soybean processing

plant, professionals such as architectural, engineering, or

management specialists will need to be consulted early in

the process. The needed expertise should be described in

the feasibility study. Assistance that will be needed for

loan agreements, legal contracts, and construction should

be documented also.

If a location has been selected, the study should

address the implications of that location—is it efficiently

situated for the potential labor supply, is it adequate for

delivery and distribution channels, does it meet city/town

ordinances and regulations, will permits be required,

resources be available to cover its costs, etc.? If a location

has not been selected, the feasibility study may provide

some prerequisite stipulations, data, and standards by

which to choose a location given the type of project,

industry, and technology involved.

INANCIAL STATEMENTS AND PROJECTIONS

VI. Financial Statements and Projections (pro forma

statements)

A Projected revenues, operating costs, and net

income

B. Capital requirements, potential and actual

sources of equity, equity accumulation schedule,

COOPERATIVE FEASIBILITY STUDY GUIDE 21

investment schedule (land, plant, equipment,

human resources, etc.)

C. Pro forma cash flow statement

D. Income, balance sheet, and sources and uses of

funds statements

E. Equity accumulation plan and financial ratio

analysis

F. Financial plan summary (description of how it

will all fit together)

Possible economic outcomes are a prominent part of a

feasibility study and are critical in the overall assessment

of a project. Therefore, it is extremely important to do a

thorough and careful job with the financials. Financial

projections are usually made for 3 years. Cash flow

statements should be monthly, while income statements

and balance sheets should be monthly or quarterly for the

first year and then annual for the second and third years.

Financial statements and projections stem from valid

and objective assumptions. Financial assumptions, such as

capital requirements, equity needs, prices, human

resources needed, and other factors, will come into play

here. Because the economics of the project are so

important to project assessment, assumptions must be in

line with the reality of the situation and should not be

overly optimistic or simplistic. Assumptions such as price

forecasts/projections should be based on solid facts, such

as historical prices and changes that have occurred in the

industry which may affect the outlook. The sources for

the facts and the rationale for key assumptions should be

well documented either in the report body or in an

appendix.

Most feasibility studies begin with pro forma cash flow

statements based on the assumptions and other data

collected about the project, such as equity collected,

product volume, purchases, sales, and expenses, for

example. Besides equity, revenue streams and operating

costs, the pro forma statements must include repayment

and interest on potential short-term and long-term debt

and/or other investments in the project. The cash flow

statements (usually done on a monthly basis) must clearly

show when capital is introduced and when it is repaid.

This is important for indicating the project’s repayment

capacity, a critical consideration for a lender or investor.

For a sample pro forma cash flow statement, see

Appendix E.

Also included in this section are income statements,

balance sheets, and sources and uses of funds statements

(or statements of cash flows). These pro forma statements

provide important information beyond the cash flow

analysis. The plan for accumulating needed member

equity adds even more information by providing dates,

sources, and amounts of equity expected (this information

will be likely obtained from a potential member survey).

Another useful analysis to include is a ratio analysis where

ratios are developed from the pro forma statements. For

example, current ratios, debt ratios, assets turnover,

return on net worth, return on investment, return on

sales, etc., should be formulated and compared during the

projected years. For sample pro forma operating, balance

sheet, and ratio statements, see Appendices F, G, and H,

respectively.

In the financial analysis, the study should show the

impact of varying key project assumptions. This

controlled variation, called sensitivity analysis, permits

planners to view which project elements are the most

susceptible to positive and negative changes. For example,

what impact does a 10-percent reduction in sales volume

have on net margins?

The sensitivity analyses conducted should then be

studied, and those that are potentially realistic should be

developed into specific scenarios, which would involve

looking at all aspects of how the proposed possible

changes would affect the project. Both “worst-case”

possibilities and optimistic scenarios should be created for

comparison purposes. A comparison table and discussion

should be developed so that it’s easy to assess the

differences between scenarios.

The financial section should summarize all the

findings of the financial analyses and provide an overall

assessment of the financial and economic implications of

the project. The financial impacts at both the cooperative

and member level should be detailed.

UMMARY AND RECOMMENDATIONS

VII. Summary and Recommendations

A. Concise Summarization of the Major Findings

B. Recommendations and Concluding Comments

C. Development schedule (remaining key steps

and accompanying dates for action)

22 VITAL STEPS

To finalize the study, the last section of text should

summarize all of the major points that the information

and analyses throughout the report provided. This will

allow the reader to fully comprehend all the different

pieces of the study and how they work in conjunction

with each other.

The project’s impact on potential members should be

addressed. Project benefits, for example projected

payment to members for product delivered to the

cooperative, and patronage refunds should be

summarized. Potential members should gain an

understanding of the benefits the proposed cooperative

would provide them and be able to use that information

to decide whether to join.

The section should clearly describe any important

factors that the steering committee needs to consider as it

works toward implementing a full assessment of the

business and making a decision on whether to proceed.

Some other aspects of the study that might be covered in

the summary include any possible project risks for

potential members or other investors, potential legal and

governmental setbacks that could come into play, and

time-critical factors, among others.

If the study shows that the project is clearly feasible,

this section should describe any important work that still

needs to be done and actions that need to be taken (with

relevant dates) as the group works toward a solid business

plan and implementation. If the study found that more

information, resources, etc. are needed before the project

will be feasible, it should clearly state such discrepancies

and provide recommendations for potential actions that

could alleviate the issues.

PPENDIX

VIII. Appendix

A Appendices (additional spreadsheets)

B. Important supplemental information

C. Notes, credentials, and references

The appendix of the report should include

supplemental tables, spreadsheets, charts, and

information—that are related to the analysis and

descriptions in the report’s body—that will provide the

reviewer with a greater understanding of the project.

Some examples of supplemental information, which will

be highly dependent on the type of business being

studied, might include:

■ Background information on assumptions used in the

analysis if not fully described in the body of the study

(some might be derived from potential spreadsheet data

given as examples here).

■ Monthly inventory tracking spreadsheets for

commodities to be handled, purchased,processed, sold

etc.

■ Monthly sales price spreadsheets for commodities to

be handled, purchased, processed, sold, etc.

■ Capital purchase and depreciation schedules for land,

buildings, equipment, parts, etc.

■ Employee schedules and salary/wage information for

any staff that will be hired (management, sales

representatives, administrative staff, warehouse

personnel, laborers, etc.).

■ Debt repayment schedules for different categories of

borrowing (real estate, equipment, working capital, etc.).

■ Pro forma financial statements (cash flow, operating,

balance sheet, etc,) for different scenarios studied, but

that weren’t a major focus in the body of the report.

■ Other industry or territorial information, such as

commodity or product alternative uses and sources,

commodity processing yield data, demographic data,

competitive data and mapping, etc.

■ Credentials of those involved in developing or

assisting with the study.

■ References used in the study and resources that will be

useful as the project progresses.

In some cases, this stated supplemental information

will have been addressed in the study’s main sections, so it

won’t have to be included in the appendix unless more

information is deemed to be required.

❹ Accepting/Rejecting the Study

The steering committee usually makes the preliminary

decision to accept or reject a completed feasibility study.

The steering committee—which has been working

closely with the consultant—has the most knowledge of

the feasibility study and thus should make a

recommendation to accept or reject the study. The final

decision then rests with the entire group after a full

discussion.

The decision to accept or reject a consultant’s work

should not be influenced by the findings of the feasibility

study, but rather by its quality. A well-crafted, but

negative, study can prevent learning the same

COOPERATIVE FEASIBILITY STUDY GUIDE 23

information later in the project process at considerable

trouble and expense. By the same token, a feasibility

study with positive returns should not be accepted merely

because it makes the project seem possible. Thus, the

primary objective of the study is not to promote the

business start-up but rather to provide an honest

evaluation of the project’s feasibility; that is, its prospect

for success.

Study approval should be based on the study’s technical

merits. Does it fulfill the work expectations that the

group had when contracting with the consultant? Are the

study assumptions reasonable and well explained? Is the

project conceptualized in a manner very similar to what

the steering committee communicated? Does the study

contain significant facts, analysis, and accuracy? Is the

study sufficiently comprehensive for a full analysis of the

project?

If key information is lacking or not felt to be properly

analyzed, the study should be revised. If the committee

thinks that other marketing avenues should be explored,

or that changing conditions warrant further study, for

example, then it should ask for those analyses to be done.

In most cases, if major changes occur to the project

idea as presented in the feasibility study, the group should

have the consultant revise it to reflect these changes or

initiate a new study. This permits the group members to

make decisions with all applicable information.

❺ Group Decisions After Accepting the Study

After the study’s quality has been deemed acceptable,

the steering committee and group need to decide whether

to proceed with the project.

Positive results from a feasibility study do not

necessarily imply that the group should proceed with the

project. Several factors could cause the group to stop or

to revise the project:

■ The situation/environment has significantly changed

since work on the study was completed;

■ The group has chosen another project it considered

more beneficial;

■ The risks are deemed greater than the group is willing

to accept;

■ Capital, size, or capacity requirements are more than

the group can accommodate; or,

■ New information shows key study assumptions to be

unrealistic.

Negative study results do not necessarily signify that a

group should stop developing the project. The group may

cautiously proceed even if study results are negative. Any

decision to continue should carefully weigh the risks

involved and openly declare those to all involved before

making a decision to proceed. Here are some reasons for

the group to consider continuing with a business plan and

project implementation when the study did not provide

favorable results:

■ The situation/environment has improved since the

study was completed;

■ Critical assumptions of the study are found to be

unduly harsh or negative, or have significantly changed;

■ More potential members and/or product volume have

been identified;

■ Define Project

■ Proceed with study?

Attain Group Commitment ■

Appoint Leaders ■

■ Hire Consultant

■ Determine Study Components

Marketing ■

Industry Background ■

Financial Projection ■

■ Study Summary

■ Recommendation

■ Go, or No Go?

24 VITAL STEPS

■ The group feels that more producers or volume

will participate once the project is closer to

implementation;

■ The group has found a partner to share the cost,

risk, capacity, etc; or,

■ Technical limitations of machinery or design have

been resolved.

The group should not proceed to develop a

business plan with negative issues still pending. It is

important that the steering committee and group

address any recommendations and limitations the

feasibility study outlines before it takes the time and

approves the expense that a business plan will take.

If a decision is made to proceed with the project,

the steering committee and group should first look at

the study’s recommendations to see what, if anything,

needs to be accomplished before a business plan is

developed. For example, does the study advise

exploring joint ventures with processors or other

industry partners or organizational structures (such as

a limited liability company), obtaining marketing

contracts from prospective members, getting

attorney assistance to meet Federal or State security

laws, researching other marketing avenues, etc.?

Written records of the decision-making process

should be made and retained. The steering

committee and group have a legal responsibility for

adequate due diligence. An attorney should be

apprised of project developments as they occur—in

this case the acceptance, rejection, or need for further

analysis—of the feasibility study. The attorney needs

this information to provide appropriate legal counsel

to the steering committee and group as it proceeds.

If all issues, recommendations, and limitations are

fully explored, and the project is declared feasible, the

group and steering committee proceed to develop a

business plan (which is part of Step 7, in “How to

Start a Cooperative”, CIR 7). Many components and

analyses contained in the feasibility study will be used

in the business plan. The steering committee and

consultant should work to identify those parts that

are relevant and acceptable for inclusion in the

business plan. With the development of the business

plan, the steering committee and group will work

toward completing the remaining events/steps of

development, as explained in CIR 7.

REFERENCES AND INFORMATION SOURCES

■ Patrie, William. “Creating ‘Co-op Fever’: A Rural

Developer's Guide to Forming Cooperatives,” Service Report

54, Rural Development, United States Department of

Agriculture, Washington, DC, July 1998.

■ “How To Start a Cooperative, Cooperative Information

Report 7, Rural Development, U.S. Department of

Agriculture, Washington, DC, Revised April 2015.

■ “Co-ops 101, An Introduction to Cooperatives” (CIR 55) is

a good information source for those needing a greater

understanding of cooperatives; it is available from USDA

Cooperative Programs.

The Agricultural Marketing Resource Center has

extensive information on value-added businesses available

at www.agmrc.org. This site also provides links to resources

for feasibility studies and business planning.

Outside advisors can assist in the development process

as well as be providers of other sources of background

information. There are a number of cooperative

development centers around the nation with the sole

purpose of being practitioners of cooperative development.

Some of these centers belong to the “Cooperation Works!”

cooperative development network

(http://www.cooperationworks.coop). However, there are

centers outside of that network as well. Those interested in

developing cooperatives can benefit from contacting a

cooperative development center in their state or region (if

there is one) for assistance.

USDA Websites:

■ Department of Agriculture: http://www.usda.gov/

■ USDA Cooperative Programs: http://www.rd.usda.gov/programs-

services/all-programs/cooperative-programs

■ USDA Cooperative Programs (publications):

http://www.rd.usda.gov/publications/publications-cooperatives

■ USDA Rural Development: http://www.rd.usda.gov/

USDA Rural Development can also assist you from its State Offices. Please

look up and contact the Rural Development State Office within your state:

■ http://www.rurdev.usda.gov/rbs/coops/cscontac.htm.

Outside websites/resources:

University of Wisconsin Center for Cooperatives:

■ http://www.uwcc.wisc.edu/

Quentin Burdick Center for Cooperatives:

■ http://www.ag.ndsu.nodak.edu/qbcc/

COOPERATIVE FEASIBILITY STUDY GUIDE 25

Identify Economic Need

01. Determine the economic need. Leaders meet to discuss issues and to determine the economic need that a

cooperative might meet.

02. Hold an exploratory meeting. Hold a meeting of potential member-users to decide if interest is sufficient to support a

cooperative.

a. Sub-step: select a steering committee to lead and move process forward.

Deliberate

03. Conduct a member-use analysis and initial market analysis. Survey the potential member-users.

a. Sub-step: hold a second member exploratory meeting.

04. Conduct a feasibility study. This helps determine if the proposed cooperative is feasible based on assumptions,

researched information, and member-use and initial market analysis.

a. Sub-step: hold a third member exploratory meeting.

05. Prepare a business plan. Complete an indepth business plan using feasibility study as foundation.

Implement

06. Employ legal counsel to draft and complete legal papers. Articles of incorporation and bylaws provide legal standing

and how the cooperative will conduct business consistent with State statutes.

a. Sub-step: hold fourth member exploratory meeting.

07. Hold first meeting of the cooperative. Approve bylaws, discuss business plan, elect first board of directors.

Execute

08. Convene first board of directors meeting. Elect officers, appoint committees, discuss next steps.

09. Hold a membership drive, if necessary for more members and commitment.

10. Acquire capital. Raise from members and by borrowing, as needed.

11. Hire a manager. Board seeks and hires a qualified manager.

12. Acquire equipment and facilities, begin operations. Board and manager determine equipment and facilities

necessary; manager hires employees.

APPENDIX A SEQUENCE OF EVENTS IN COOPERATIVE DEVELOPMENT*

* From “How To Start a Cooperative”, Cooperative Information Report 7 (page 6, Figure 1); See report for more detailed information on this table.

26 VITAL STEPS

GROUPS SOMETIMES confuse the role of two tools used in

business project development—the feasibility study and the

business plan. The feasibility study helps determine whether

to proceed with implementing the business while the

business plan spells out how it will be implemented. Each

has common components. Assuming positive feasibility study

results, much of its information is incorporated into the

business plan.

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 scenarios for the group to use in

determining if it continues the project. If, after completing a

feasibility study, the group decides to not proceed, there is

no need to create a business plan.

If the group decides to proceed, it prepares a 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 project operations. The

business plan usually contains less emphasis on scenarios

than the feasibility study.

Typically, it highlights 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.

Project 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 should be an independent review of

the project by one or more experts outside of the group. In

contrast, the group itself typically develops its business plan

internally, sometimes with the assistance of a consultant. It

needs to be based on group members’ vision for the

business, since they will be the owners. The group revises

the plan with information from bankers and investors once

the project situation becomes more defined.

Although this difference is not as important for project

development considerations, the feasibility study is only used

prior to implementation. In contrast, businesses continue to

use and revise their business plans after a project has been

implemented. The feasibility study refines the group's initial

ideas, while the business plan uses information from the

study to further prepare the project to evolve into an

operating business.

APPENDIX B THE FEASIBILITY STUDY VS. THE BUSINESS PLAN

Points Awarded

Previous experience creating feasibility studies (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 Cooperative Service Report 54, “Creating 'Co-op Fever': A Rural Developer's Guide to Forming Cooperatives.”

APPENDIX C SAMPLE FEASIBILITY CONSULTANT SELECTION CRITERIA*

COOPERATIVE FEASIBILITY STUDY GUIDE 27

A FEASIBILITY STUDY by a recognized independent consultant

may be required by the Agency for start-up businesses or

existing businesses when the project will significantly affect

the borrower’s financial operations. An acceptable feasibility

study should include, but not be limited to:

(a) Economic feasibility. Information related to the project

site; availability of trained or trainable labor; utilities; rail, air,

and road service to the site; and the overall economic impact

of the project.

(b) Market feasibility. Information on the sales organization

and management, nature and extent of market and market

area, marketing plans for sale of projected output, extent of

competition, and commitments from customers or brokers.

prepared by individuals who have previous experience in the

design and analysis of similar facilities or processes

proposed in the application. The technical feasibility reports

shall address the suitability of the selected site for the

intended use including an environmental impact analysis.

The report shall be based upon verifiable data and contain

sufficient information and analysis so that a determination

may be made on the technical feasibility of achieving the

levels of income or production that are projected in the

financial statements. The report shall also identify any

constraints or limitations in these financial projections and

any other facility or design-related factors which might

affect the success of the enterprise. The report shall also

identify and estimate project operating and development

costs and specify the level of accuracy of these estimates

and the assumptions on which these estimates have been

based. For the purpose of the technical feasibility reports,

the project engineer or architect may be considered an

independent party provided neither the principals of the firm

nor any individual of the firm who participates in the

technical feasibility report has a financial interest in the

project, and provided further that no other individual or firm

with the expertise necessary to make such a determination

is reasonably available to perform the function.

(d) Financial feasibility. An opinion on the reliability of the

financial projections and the ability of the business to

achieve the projected income and cash flow. An assessment

of the cost accounting system, the availability of short-term

credit for seasonal business, and the adequacy of raw

materials and supplies.

(e) Management feasibility. Evidence that continuity and

adequacy of management has been evaluated and

documented as being satisfactory.

APPENDIX D USDA RURAL DEVELOPMENT SUMMARY GUIDE FOR FEASIBILITY STUDIES INCLUDED IN

APPLICATIONS FOR BUSINESS & INDUSTRY LOAN GUARANTEES (INSTRUCTION 4279-B)

28 VITAL STEPS

Pro forma cash ﬂow statement, FY 20XX*

Item Mth 1 Mth 2 Mth 3 Mth 4 Mth 5

Cash Receipts

Cash sales**

Credit collections

Commission fees

Interest income

Loans/equity

TOTAL RECEIPTS

Cash Paid Out

Purchases**

Salaries

Employee wages

Payroll expense

Bad debts

Outside services

Supplies

Repairs & maintenance

Advertising/promotion

Car/travel

Accounting & legal

Rent

Telephone

Utilities

Insurance

Property taxes

Other taxes

Interest on loans***

Depreciation

Miscellaneous

Subtotal

Principal payment***

Capital purchases

Income taxes

Other withdrawl

TOTAL CASH PAID

CHANGE IN CASH

Beginning balance

Ending balance

*May have multiple statements for different years.

**May have more than one cash sale and purchases line (more commodities/products).

***May have more loan and interest payment lines if more loans are obtained.

APPENDIX E SAMPLE PRO FORMA CASH FLOW

COOPERATIVE FEASIBILITY STUDY GUIDE 29

Mth 6 Mth 7 Mth 8 Mth 9 Mth 10 Mth 11 Mth 12 Totals

30 VITAL STEPS

Pro forma income statements, FY 20XX – FY 20XX*

Item FY 20XX FY 20XX FY 20XX FY 20XX FY 20XX

INCOME $ $ $ $ $

Cash sales

Commission fees

Total sales

Cost of goods sold

GROSS MARGIN

EXPENSES

Salaries

Employee wages

Payroll expense

Bad debts

Payroll expense

Outside services

Supplies

Repairs & maintenance

Advertising/promotion

Car/travel

Accounting & legal

Rent

Telephone

Utilities

Insurance

Property taxes

Other taxes

Depreciation

Miscellaneous

TOTAL OPERATING EXPENSES

Operating income

Interest expense

NET MARGIN

Unallocated earnings

Allocated earnings

APPENDIX F SAMPLE PRO FORMA INCOME STATEMENTS

* This example shows ﬁve-year projections but many projects focus on just three years. Operating

statement line items will vary in description and inclusion depending on project.

COOPERATIVE FEASIBILITY STUDY GUIDE 31

Pro forma balance sheets, FY 20XX – FY 20XX*

Item FY 20XX FY 20XX FY 20XX FY 20XX FY 20XX

ASSETS $ $ $ $ $

Current assets

Cash

Accounts receivable

Inventory

Prepaids (e.g., insurance)

Other

Total current assets

Fixed assets

Machinery & equipment

Buildings

Land

Less: accumulated depreciation

Total ﬁxed assets

TOTAL ASSETS

LIABILITIES AND MEMBER EQUITY

Current liabilities

Accounts payable

Taxes payable

Patronage refunds payable

Line of credit

Interest payable

Total current liabilities

Long term liabilities

Machinery and equipment note

Real estate and building

Total long term liabilities

Total liabilities

Member Equity

Common stock

Preferred stock

Allocated earnings

nallocated earnings

Per unit capital retains

Total member equity

TOTAL LIABILITIES & MEMBER EQUITY

APPENDIX G SAMPLE PRO FORMA BALANCE SHEETS

* This example shows ﬁve-year projections but many projects focus on just three years. Balance

sheet line items will vary in descriptions and inclusion depending on project.

32 VITAL STEPS

Pro forma ﬁnancial ratio analysis, FY 20XX – FY 20XX*

Item FY 20XX FY 20XX FY 20XX FY 20XX FY 20XX

Current ratio

(current assets/current liabilities)

Debt ratios

(total debt/total assets)

(total debt/member equity)

Average collection period

(receivables/sales per day)

Total assets turnover

(sales/total assets)

Proﬁtability ratios

Return on equity

(net margins/total equity)

Return on Invesment

(net margins/Investment)

Return on sales (net margins/sales)

APPENDIX H SAMPLE PRO FORMA RATIO ANALYSIS

* This example shows ﬁve-year projections but many projects focus on just three years.

Ratio analysis items will vary in descriptions and inclusion depending on project.

COOPERATIVE FEASIBILITY STUDY GUIDE 33

In accordance with Federal civil rights law and U.S.

Department of Agriculture (USDA) civil rights regulations and

policies, the USDA, its Agencies, offices, and employees, and

institutions participating in or administering USDA programs

are prohibited from discriminating based on race, color,

national origin, religion, sex, gender identity (including gender

expression), sexual orientation, disability, age, marital status,

family/parental status, income derived from a public

assistance program, political beliefs, or reprisal or retaliation

for prior civil rights activity, in any program or activity

conducted or funded by USDA (not all bases apply to all

programs). Remedies and complaint filing deadlines vary by

program or incident.

Persons with disabilities who require alternative means of

communication for program information (e.g., Braille, large

print, audiotape, American Sign Language, etc.) should contact

the responsible Agency or USDA’s TARGET Center at (202) 720-

2600 (voice and TTY) or contact USDA through the Federal

Relay Service at (800) 877-8339. Additionally, program

information may be made available in languages other than

English.

To file a program discrimination complaint, complete the USDA

Program Discrimination Complaint Form, AD-3027, found online

at How to File a Program Discrimination Complaint and at any

USDA office or write a letter addressed to USDA and provide

in the letter all of the information requested in the form. To

request a copy of the complaint form, call (866) 632-9992.

Submit your completed form or letter to USDA by: (1) mail: U.S.

Department of Agriculture, Office of the Assistant Secretary

for Civil Rights, 1400 Independence Avenue, SW, Washington,

D.C. 20250-9410; (2) fax: (202) 690-7442; or (3) email:

[email protected].

USDA is an equal opportunity provider, employer, and lender.

U.S. Department of Agriculture

Rural Business–Cooperative Service

Stop 3250

1400 Independence Ave., S.W.

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.