BIZTIPS - Septermber 21, 2008

by Art Hill

Biz Tips: Feasibility Plan Tests Business Assumptions

Congratulations! You worked with experienced advisors to develop a solid business plan for your new or growing business. You packaged it with other documents in your loan application, and now you may qualify for a loan guarantee that will reduce risk and make your application more attractive to your banker.
But the loan guarantee requires a feasibility study. Although fairly routine, the role of a feasibility study is not widely understood. Is it an audit of the business plan? Is it something you can do yourself? Who needs it anyway?
 
Let’s take these questions one at a time. First, a feasibility study can be used as a business plan audit. Some investors consider it a first step in “due diligence” to determine whether your business plan is realistic based on objective research. A feasibility study may cover the entire business plan or just one piece of it, for example whether you can get enough timber to make your sawmill profitable. Either way, it is generally used to shine the bright light of evidence on assumptions in the business plan.
 
The answer to the second question is “definitely not.” Doing your own feasibility study would be like putting the fox in charge of the hen house. The main reason for a feasibility study is to get objective, expert review of your business plan, not to rubber-stamp it or ignore the missing parts. The US Department of Agriculture requires that feasibility studies for certain types of loan guarantees be performed by independent consultants such as Small Business Development Centers or specialized CPA’s.
 
There are multiple answers to “Who needs it?” The obvious choice is the bank or loan guarantor. But the most important beneficiary of the feasibility study is you. Sure you’re an expert in producing the product or performing the service in your business plan. But do you have any sales experience? Any financial experience? Two recent feasibility studies concluded that the business plans they covered didn’t even mention sales staff, much less budget for them. One of the plans had a mind-numbing 92 pages of financial projections prepared by a financial expert, but no clear sense that the owners understood the impact of those projections.
 
Feasibility studies usually result in “findings” and recommendations. Sometimes the findings are serious errors or omissions in the business plan that must be addressed before funding can be approved. Sometimes the recommendations are just tips to reduce risk and increase the likelihood of business success. Just having the objective review of an expert is valuable. Saving your business from a critical error is priceless.

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