Purpose: To determine whether the proposed co-operative is economically viable.

There are three main components in determining the feasibility of an agricultural co-operative:

Producer Survey: A survey will determine producer interest in the project. It will also help to clarify the products and services which the co-operative might offer.

Market Analysis: A market analysis will determine if the proposed co-operative has an economic role to play in the marketplace, and will clarify how it can best play this role.

Financial Feasibility Assessment: The findings of the producer survey and market analysis are used to develop some basic operating assumptions, allowing for an assessment of financial feasibility. This assessment analyzes the costs associated with meeting the economic goals identified and estimates how much income must be generated to cover these costs.

Allow the scale and the complexity of the proposed business to determine the time and effort that goes into examining the feasibility of the co-operative. Depending on your situation, a feasibility study need not be elaborate and costly, but it must address the risks, benefits, strengths and weaknesses of the proposed business. A good feasibility study will determine the potential for a successful business, but it will not provide any guarantees. There are no right or wrong answers in a feasibility study - only informed evidence that an idea will succeed or fail.

Much of the information collected to determine feasibility will also be used to develop a business plan. The major difference is that the purpose of a feasibility study is to research and analyze all of the possible options for action before a decision on a particular course of action is made. The business plan summarizes the plan of action after a decision has been made.

Throughout this step, be prepared to work with a number of external advisors who are familiar with your industry, agricultural markets and the co-operative development process. If the proposed co-op is intended to serve a large number of members or undertake complex business operations, you will want to hire or otherwise enlist a consultant to obtain an objective, independent assessment of the project's financial feasibility. An independent consultant can also help to preserve confidentiality when undertaking producer and market surveys (see following section further discussion on the role of external advisors in starting a co-operative).

Producer Survey

Survey potential members. Survey as many potential members as possible. Producer associations, industry organizations and government representatives are useful sources for identifying potential members. Use a questionnaire to survey producers by mail or in person. Surveys can also be conducted at scheduled group or association meetings.

Ask the following types of questions in your survey:

• What goods or services do you have a need for?
• How do you feel about forming a co-operative
  and participating in it?
• How much business volume do you anticipate
  generating for the co-operative?
• Are you willing to invest in the co-operative?
• What are your location and business or service
  preferences?

It is important that your survey be thorough, confidential and accurate. Survey results should indicate the level of producer support in terms of business volume and whether or not there is sufficient financial commitment to organize and successfully operate the proposed co-op. Results will also be used to plan for facilities and needed equipment.

Evaluate survey results.

In analyzing the results of the survey, estimates of both membership and volume should be conservative. Not all of the producers who are interested in the project will join and some may wait to join later. Similarly, not all who join will make the fullest use of the services provided by the
co-operative.

Market Analysis

Collect information on suitable markets, service providers, and/or sources of supply.

Collect market information by talking to people involved in each level of the marketing chain, including distributors, brokers, retailers, manufactures, suppliers, and consumers of the products and services to be provided by the co-op. If the product or service intended by the co-operative is new to the market, research into who will purchase it must also be carried out.

Useful tools to gather market information include telephone surveys, personal interviews, sales figures on existing products, statistical information, and test marketing. Potential buyers and
suppliers contacted should be asked about:

• quantities purchased or supplied annually and average order sizes;
• prices paid at each level of distribution for these quantities;
• pricing variation for differences in quality and product attributes (such as grade and size);
• maximum lead times required for delivery;
• seasonality of demand, supply and prices.

Identify and evaluate potential competitors and barriers to entry.

Identify potential competitors operating in each of the markets in which the co-operative intends to operate. Critically evaluate the level of competition and the possible barriers to entering these markets. Possible barriers to entry include the inability to source needed supplies or production inputs, consumers' loyalty to an established brand name, government regulations, and the cost of acquiring market information or processing technologies needed to compete effectively.

Consider alternatives to the formation of a new co-operative.

Contact other co-operatives which provide similar services and assess the potential for linking up with existing businesses. Even if starting a new co-operative is the best course of action, the search for beneficial links with other co-operatives and businesses should continue on an ongoing basis.

Financial Assessment

Determine capital requirements.

To determine the capital requirements of the proposed co-operative, you will need to make financial projections for the start-up and the first three years of operations. Cost estimates should be based on the expected business volume plus some allowance for future expansion.

Sufficient capital will be needed to cover:

• start-up costs - are those costs which are incurred before any revenues are generated. They generally include the cost of products required to start operations; initial operating and personnel costs incurred prior to starting operations; and the cost of preparing and implementing the business plan.
• operating costs - include items such as employee salaries, utilities, taxes, depreciation, interest, and marketing costs.
• capital costs - include land, buildings, machinery and equipment.

Consult with professionals and skilled technicians to determine the need for new facilities and assess the value of any existing facilities being considered. Investigate the possibility of leasing existing facilities and equipment as opposed to purchasing.

Estimate expected sales and revenue.

Sales and revenue estimates for a marketing or processing co-operative should be broken down according to each commodity and quality grade handled by the business (including by-products). For a supply co-operative, estimate the sales and revenues for each type of service and product
provided by the co-op.

Develop financial statements.

Organize financial information in commonly used statements, including:

• an income statement, which relates expected revenue to expenses;
• a balance sheet which outlines members' equity in the co-operative;
• a cash flow statement which records the inflow and outflow of cash.

Information contained in the financial statements will be used to measure the likelihood of success of the co-op in comparison to similar businesses by prospective lenders and other stakeholders.

Research question: Can the co-operative efficiently deliver the intended services or products at a price people are willing to pay?

Conduct a sensitivity analysis.

An important part of the feasibility analysis is to review the sensitivity of financial projections to changes in operating assumptions. For example, what impact will a 25 percent decrease in product sales have on profitability? Other key factors might include wage rates, operating efficiencies, and interest rates. Include "best" and "worst" case scenarios in your analysis. Note that a co-operative's lowest possible operating costs generally occur when its members furnish it with the maximum amount of business it can handle.

Examine financing options.

Co-operative businesses finance their operations through a combination of member investment and debt financing. Investment of capital in a co-op by non-members is prohibited under the B.C. Cooperative Association Act.

The best source of financing for a co-operative is from members-member equity forms the basis for producer ownership of the business and is used to apply for debt financing. Ways in which members contribute equity capital to their co-ops include:

• direct contributions such as membership fees or share purchases;
• agreements to withhold a portion of net earnings from the co-op's business operations;
• assessments based on units of product or services sold or purchased.

The more financing members provide, the less the co-operative business will need to borrow. A general rule of thumb for a new co-operative business is to meet forty to fifty percent of its capital requirements through member investment.

Hold a general meeting to review the results of the feasibility study.

Once the three components of the feasibility study are complete, hold a general meeting of the potential membership to review the results. Prepare for the meeting by sending copies of the feasibility results to potential members along with a summary of the steering committee's recommendations. Encourage participants to bring other potential members.

Include the following items in your agenda:

• a step-by-step review of the findings of the producer survey, the market analysis, and the projected financial feasibility of the co-op.
• discussion about all aspects of the feasibility study including the level of producer commitment required, potential markets and competition.
• a vote on whether or not to proceed. If the vote is positive, form subcommittees and delegate the tasks involved in completing the next steps in the development process.

Decision Question: Are potential members confident enough in the results of the feasibility study to proceed with the formation of the co-op?