Establish Financial Feasibility for Your Co-op Project

When it comes to development projects, the word “feasibility” is often used to describe everything from financial forecasting to market potential. It is all of that and more. Feasibility means exploring whether a project is economically justifiable, and that it is worth the investment of time, talent and capital. Feasibility also explores the abilities and capacity of your co-op’s leadership and the preliminary design of the proposed facility. A feasible project demonstrates credibility not only to lenders, but to the community at large as well.

That’s why business development consultants Don Moffitt and Bill Gessner talk about feasibility as a process that occurs within groups and organizations that encompasses internal and external capacity. They note that people embarking on a project often think about assessing feasibility in terms of the market study. If the market study shows a good opportunity, then it seems clear that the project should proceed, right? But there are so many more feasibility factors to consider.

A market analysis is a very necessary part of the process, but it’s only one component. Financial feasibility includes projections (a financial pro forma) for startup and expansion costs, operations, revenue and profitability. A financial pro forma looks at what funds will be needed and where they can be obtained, and whether the co-op will have the capacity to service the debt that it takes on. The organization needs to know how resources will be managed and what kind of talent they’ll need to do that. Operational and technical requirements will need to be identified as part of the process. Nobody wants to hear a project has daunting financial challenges or that it is not a good location, but clear-eyed realism is just as important as vision. The willingness to listen to experts and hear their advice can often be a strong predictor of future success.

Moffitt said that conducting the research is the beginning, and determining what it will take to move forward with a proposed financial model is what follows. “It’s important to plan for a financial reality that will see you through the first three years of operations after startup or expansion,” said Moffitt. “You need to spend time understanding what it will take to make it work.”

The CDS Consulting Co-op developed the Four Cornerstones in 3 Stages model of development to help people starting new co-ops gain understanding of what they need to do as they work through the process.
Every project is different, but each group needs the cornerstones of vision, talent, capital, and systems, within a 3-stage framework, starting with organizing, feasibility and eventually implementation. The feasibility process includes addressing these four components:

  • Market feasibility
  • Internal readiness
  • Financial feasibility
  • Design feasibility

Moffitt said it’s not unusual as part of the whole feasibility process to recommend co-ops do further research. “People need different feasibility studies because a funder or investor will be much more interested in the well-researched project.” The next step in the process is to apply what they’ve learned to their individual co-op situation and plan for it.

Bill Gessner said the advantage to getting assistance and doing this systematically is that “more people get educated on what will make the project more feasible.” He said that sometimes people think market study results are the be-all-end-all. “A market study might show you have a market, but that doesn’t tell you whether it’s financially feasible, or tell you whether the co-op has internal readiness. That’s why we look at overall feasibility as process of discovery.”

Gessner said it’s also important for co-ops to interact with the person doing their market analysis by asking questions, not just assuming a positive market study is a green-light for a project. “It’s not like you push a button and out pops a project. Developing a feasible project is a work in progress.” Part of that is also dealing with sticker-shock. “Projects cost a lot of money when you look at what is needed to be successful,” Gessner said.

Moffitt doesn’t see this as a reason to despair—rather a call to action—especially around capitalization. Raising money is tougher than ever, and the lending climate changes all the time. The 5 C’s of credit—capacity, capital, collateral, conditions and character—are fundamentals that will always apply. A project’s chances are better when it’s backed by a thorough feasibility process.

“It’s a challenge all co-ops face,” Moffitt said. Cooperatives are based on user-benefit for owners rather than exist as investment-driven vehicles, so it can be harder for lenders to understand how it can be a sustainable business model. Strong feasibility contributes to lender interest and education.

Cooperatives also need the kind of patient investment that often only owners can provide in the form of preferred stock or member loans. “You’re looking for mission-driven investors in cooperatives. You have to talk to a lot of people,” Moffitt said.

In addition to capital from members, co-ops also look to lenders, city and public institutions, foundations and grant money. Moffitt said, “One of the creative parts is figuring that out. Is the potential of the store enough to attract financing? And what is the funder looking for? Jobs, economic development, or to act as a catalyst in a community?”

Gessner said that for startup co-ops, a certain level of subsidy is very helpful in terms of giving a project a financial push, but cautions against relying on it too heavily. “It can shift attention away from owner equity. Capital from owners should be at the heart of demonstrating whether there’s enough capital to leverage external debt.”

That’s why Gessner thinks it’s important for co-ops to fully engage with the feasibility process. Doing that is also part of the cooperative difference. It is how people learn enough to gain confidence in the project and get skilled talking with owners about investing in it. It promotes buy-in and ownership. “When a group gets engaged together in looking at the proforma and moving it forward, there is a dialogue that leads to deeper understanding.”

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By |November 9th, 2017|Categories: Articles, Solutions|Tags: , |

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