Feasibility Study - Safety in Knowing a Project is Viable
By Robert Roman
The purpose of a feasibility study is to determine if a concept or idea is commercially viable.
Feasibility studies are usually prepared when a developer or investor wants to obtain financing from a bank or lender to build or purchase a car wash.
Studies may also be undertaken during the concept phase of a project to weigh alternatives before making a go/no-go decision or when considering expansion of a business to help minimize risk.
All feasibility studies have elements in common, but there is no cookie-cutter approach or template that can be applied to every project. A study for a $2.5 million express wash is very different from a study for a $9.0 million multi-profit-center site with car wash, gasoline, convenience store, and food services.
Elements common to all feasibility studies are market, competition, financial, and projections. Market assessment should address size and potential value of the trade area, industry overview, and target-market demand.
Since location is a critical factor for a car wash, the study should identify the criteria used to determine the location’s suitability. There should be rankings to determine whether acceptable locations are viable, strong, or weak.
The criteria needed to make these determinations are socio-economic data and site location characteristics. Area and household statistics include population density, growth vectors, age and income distribution, cost of living, economic outlook, climate, etc.
Site and location criteria include traffic counts, traffic pattern, highway geometry, lot size and position, access and visibility, composition of surrounding development, etc.
Generally speaking, transparency and accurate, reliable information is more important than a huge volume of numbers, charts, and figures.
The study should look at the nature of competitors in the current marketplace. For example, an express wash usually competes against several similar washes, but it also competes with other types of nearby washes.
These may include full-service conveyors, in-bay automatics at gas stations, self-service locations, new-car dealerships, mobile operations, charity washes, etc.
Consequently, a thorough study would include data and analysis on all of these potential competitors as well as an assessment of the potential for future competition.
Financial assessment addresses the nuts and bolts of a project in terms of start-up costs, revenue and income projections, anticipated operating expenses, and sources of financing.
Projections would include the estimates of sales and expenses that banks and lenders use to prepare project-specific analysis of the primary source of repayment. Since the primary source will be the cash flow from the car wash, the borrower has to demonstrate how different capture rates affect cash flow and debt service (projected versus stressed).
Feasibility study options vary by purpose. For example, if the loan is part of a workout process, the feasibility study would place emphasis on competency, cooperation, and financial and operational viability.
Consequently, it would be important to demonstrate the borrower has the necessary technical and management skills to turn the business around. For example, is the borrower willing to take the necessary action to address the problem? Is there sufficient availability of resources inclusive of materials, labor, and management expertise?
If the loan is for a start-up, the feasibility study would include the common elements plus business model, technical, and exit strategy viability. Assessment of the business model should demonstrate uniqueness of model in terms of competitive advantage and likelihood of gaining traction in the marketplace.
Technical assessment would address capacities, design and layout, processes, supply chain, and ability to measure and monitor performance.
Assessment of exit strategy should demonstrate the ability to define an exit strategy related to the industry model, identify potential buyers, schedule an exit, and create wealth.
Last, would be to weigh the overall and segmented viability of the business concept and reach a conclusion. Generally speaking, when the overall viability in a proposed venture is greater than 80 percent, the business should be considered commercially viable.
Bankers and lenders will usually insist on getting an independent study to avoid potential bias, as it’s only natural for developers and investors to get overly attached to their own ideas.
Folks that have little or no experience with consultants or brokers often have unrealistic expectations for consulting project pricing and outcomes. For example, it is not that unusual to encounter business owners who want customized solutions tailored precisely to their needs but want to pay commodity pricing.
Experience shows feasibility study pricing varies considerably by scale and complexity. Generally speaking, fees start at $1,800 for small properties such as a self-service wash. $2,500 to $4,500 is typical for small and mid-sized operations with revenues below $10 million. Projects with higher degrees of complexity are more.
One reason for doing a feasibility study is to get an expert opinion to validate whether it makes sense to move forward with a project. The idea is to reduce risk through research and analysis.
Consequently, it’s crucial to engage professionals with a specialization in the car wash industry.
In the final analysis, it’s the quality of the study — not quantity of pages and data — that leaves developers and investors safe in the knowledge whether the investment or project is viable or not.