Auto Laundry News - June 2013

Feasibility Study — Supporting the Decision-Making Process

By Robert Roman

In the way to making money in the car wash business, developers and investors take one of two paths: buy an existing business or start one from scratch.

Starting from scratch is more difficult because there is no financial history to form the basis for financial projections to support external funding of the project.

So to begin, the principals often prepare a concept study to arrive at a preliminary estimate of the total project cost. This estimate or budget would identify the assets and working capital needed to bring the project to a commercially viable state.

Concept studies are based on the proposed business model, preliminary drawings, industry benchmarks, general cost factors, engineering estimates, and bids. The accuracy of such studies is typically +/- 25 percent.

However, if the project “passes” at this level, it is usually decided that the project merits further consideration. “Pass” means preliminary estimates equal volume levels needed for loan pay-off and recovery of investor’s equity.

Once the project’s stakeholders arrive at this conclusion, the results of the concept study are used as the basis to create a start-up business plan. The next step is to obtain external funding.

Here, sources of commercial funds will require borrowers to follow a formal process. Part of this process (further consideration) is to assess the feasibility of a startup business plan.

A feasibility study is a report prepared by an independent third party that analyzes a business venture’s prospects for success. The analyst impartially lays out the features of the business plan and critiques them, analyzing the strengths and weaknesses of the venture, and assessing its overall viability.

To give weight, lenders will require the feasibility study to be prepared by a qualified consultant with expertise in the type of operation being analyzed.

The recommended feasibility-study form will validate the business concept by core dimensions of market, business model, technical, management, financial and economic, and exit strategy. Each dimension is assessed independently and validated and then as a whole.

The purpose of a feasibility study is to provide stakeholders with evidence that a proposed business venture will be commercially viable. This is achieved by showing that continuity exists between the research analysis and the proposed business model.

For example, when preparing a concept or business plan, car wash developers will provide information related to the nature and extent of a market and trade area, projected output, and extent of competition.

In a feasibility study, the analyst would evaluate this information based on analysis of demand/supply balance and convenience and usefulness criteria. The purpose is to determine if there is a public need for the new wash.

In developing a project budget, developers will identify assets required and make estimates of anticipated operating expenses and development costs. In a feasibility study, the analyst would evaluate this information to determine suitability of the selected site for the intended use as well as the reasonableness of the assumptions on which estimates have been based.

Most start-up business plans conclude with subsequent years of financial projections and financial analysis and ratios. In a feasibility study, the analyst would provide an opinion on the reliability and sustainability of the financial projections and the ability and capacity of the business to achieve projected income and cash flow.

Today, most lenders are placing more emphasis on management feasibility. Here, the analyst would evaluate evidence of management and staff continuity and adequacy being satisfactory.

The final dimension is exit strategy. Here, the analyst would evaluate the developer’s ability to define an exit strategy, relate it to the industry model, and create wealth from it.

The final component of the study is to weigh the overall and segmented viability of the business. This is a process of applying weights against each dimension of the model so the analyst can collectively assess the viability of the business overall. This process is mostly subjective but it requires information gathering that reduces the level of uncertainty.

Experts recommend a weighting scale of 0 to 100 and suggest that when the overall viability in the proposed business venture is more than 80 percent the decision made should recommend the business as being commercially viable.

Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at bob@carwashplan.com.

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