How to Conduct a Feasibility Study?
Often times we receive a request for a feasibility study. Feasibility studies can take many forms depending upon the nature of the business and the intended purpose of the study. Typically a feasibility study wants to answer the most important question. Is this idea or opportunity really worth pursuing? With the expertise of an independent third party that question can be answered objectively.
An example of a feasibility study process is presented below. Although this example is for an assisted living facility, the process is similar for most projects. Since Strategic Performance Group LLC (SPG) has conducted hundreds of market feasibility studies we have developed a model and methodology that has been tried and proven. When reviewing the feasibility for an assisted living facility there are four components that are critical to the study.
1. Industry Overview
Factors that we look for within the industry overview include growth trends in the industry, the market size of the industry, an overview of long term care including the profile of a typical resident (age, gender, etc.) in an assisted living facility and their average length of stay. Other industry data may include average revenue generated, gross and net profit margins and operating ratios.
2. Demographics of the target market area.
The target market can be defined as a specific radius of the proposed facility. Depending on the market, that area can range from as little as 5 miles up to 30 miles or more. Demographics that are critical for analyzing the feasibility of an assisted living facility are the number of people in the target market that are over a certain age, e.g. 75, the mix of males vs. females, household income, one person households, etc. It is not only critical to acquire current year demographic statistics but also a 5 year projection so that future market potential is also taken into consideration.
3. Competitor overview
A competitor analysis is critical in ascertaining the current demand for assisted living facilities. Once all the assisted living facilities in the market area are identified then it is important to interview the management staff at each facility. The market survey includes information on each facility including age of facility, number of beds or units, type of units, i..e. 1 bedroom, 2 bedroom, studio, private, semi-private, etc., size of each unit in terms of square footage, monthly fee charged per unit, occupancy rates, waiting lists, initiation fees and specialized care such as Alzheimer’s and dementia.
Analysis and Recommendations
Once the industry overview, demographics identified and competitive analysis are completed, the next step is to analyze the information gained in the market place. The analysis will consider demand – current and potential, demographics, competition, etc. to determine whether an additional assisted living facility has sufficient demand to support it. As part of the analysis, revenue potential is projected based on number of units in the facility. Income is then projected based on number of units and expected fees per unit.
As a result of the feasibility study, a GO / NO GO recommendation is made by SPG based on a thorough review and analysis of the market. The client can then use the professionally prepared report to make a final decision or to meet with lenders, investors, etc. for financing, knowing that they have received an objective and independent assessment of the feasibility for developing the project.