Evaluating the Feasibility of Business Opportunities

R. Wagner

FACTSHEET 17-027 AGDEX 811 AUGUST 2017

(replaces OMAFRA Factsheet 09-007 of the same name)

THE FEASIBILITY ANALYSIS MINDSET

Some of the information in this Factsheet is based
on principles outlined in the Stage-Gate® process.
A feasibility analysis is conducted in several stages.
See Robert G. Cooper, Winning at New Products: The more complex the business proposal, the more
Creating Value through Innovation (Fourth Edition). stages of analysis needed. At the end of each stage,
Product Development Institute Inc. 2011. Stage- the business planner is required to do two things:
Gate® is a registered trademark of RG Cooper and • set criteria by which the project will or will not
Associates Consultants Inc., Oakville ON.
proceed to the next planning phase
• make a decision to proceed to the next stage or to
INTRODUCTION abandon the idea at this point
Feasibility analysis is a tool business owners can use
to evaluate a proposed change in a business. This These criteria depend on the goals set at the beginning.
change may involve developing a new product,
improving an existing product, changing marketing Example 1
strategy or expanding or contracting the business. If the entrepreneur sets a goal to increase profit
by $50,000 per year, the criteria may be that profit
One dictionary defines feasibility as “capability of must increase by at least $25,000 or it is not worth
proceeding. But a market assessment shows the
being used or dealt with successfully.” It is that word business is unlikely to net more than $10,000 extra
— successfully — that gives feasibility analysis its from added sales, so the entrepreneur decides to
real value as a planning and risk management tool. abandon the project, looking for a different opportunity.
In business terms, success is usually defined as some
measure of profit or increased value. An entrepreneur
may have other goals, such as expanding the business SETTING GOALS
to allow a family member to join the firm. Even in Often, a single goal is set against which the
that scenario, the expansion must provide sufficient performance expectations of a new enterprise may be
extra income to compensate for the additional cost. If measured. At times, a long-term goal and one or two
the feasibility analysis indicates that the goal may not shorter-term goals by which start-up performance
be met, the entrepreneur can abandon the idea before may be measured are set. These goals should conform
investing heavily in the expansion. In other words, to the S.M.A.R.T. model (Specific, Measurable,
the feasibility analysis provides a means whereby the Achievable, Realistic, Timely), as the decision to
entrepreneur can justify whether to proceed with or proceed or abandon will be based on the ability of the
abandon a business proposal. proposed enterprise to actually reach these goals.

A change in business always involves risk. A thorough The ability to remain objective is imperative in the
feasibility analysis identifies factors that contribute to setting of goals and throughout the feasibility study.
the risk, the probability these factors will happen and Every step in the process is designed to move the
their effect on the proposed business opportunity and entrepreneur closer to a goal. It is important the goal
entrepreneur. This analysis allows the development of be clear and remain static, and that the entrepreneur
an advanced plan to mitigate the risk factors and to be able to clearly define whether an activity will
establish appropriate contingencies, such as insurance meet the objective.
or alternate markets.
In a feasibility analysis, two sets of goals are Decision to “Proceed” or “Abandon”
necessary. The first set defines what the business is The decision-making activity is easier if “minimum
expected to achieve in a given time period, while the acceptable” criteria for each stage are established.
second set defines the minimum acceptable criteria Either the project meets the minimum criteria
that must exist if an analysis shows the business plan or it does not. If it does not, then the project is
will not reach its first goal. abandoned. If the project meets or exceeds the
criteria, the entrepreneur can proceed to analyze the
Example 2
next stage.
The entrepreneur may decide a new enterprise should
gross $50,000 in its first year of production, $125,000 This is where it is critical to remain focused and
in year 2 and $200,000 in year 3. At these rates of objective. If a “maybe” enters the decision, the goal
return, it would be expected to lose $50,000 in year 1, or the information is not well defined. It may be
break even in year 2 and net $50,000 in year 3. necessary to re-define the goals and start over, or to
These financial goals would be reached if the venture
could sell 10,000, 25,000 and 50,000 widgets at
do the activity more thoroughly.
$5 each respectively in the first 3 years of operation.
These are the production goals for the enterprise. STAGES OF EVALUATION
Feasibility analysis is a practical process. It forces
the entrepreneur to examine the real circumstances
These goals are specific, measurable and timely. that the venture is likely to encounter. This is
The study will reveal whether they are realistic where the entrepreneur’s understanding of business
and achievable. management is challenged. The more thoroughly he
or she can examine the various business factors, the
ESTABLISHING CRITERIA more reliable the conclusions of the feasibility study.
The last activity in each stage of analysis is to set the
criteria against which the results of the analysis will Stages of Feasibility Analysis
be judged. These criteria are based on the goals set 1. Examine the idea.
for the project, and allow the entrepreneur to decide
whether to proceed to examine the idea further or to 2. Examine the management capabilities of
abandon the idea altogether. the entrepreneur.
3. Examine the technical capabilities of
Example 2 continued the organization.
The entrepreneur may decide that returns of $25,000 4. Examine the marketing potential for the product
in year 1, $75,000 in year 2 and break-even at
$150,000 in year 3 are tolerable. These are the
or service.
minimum acceptable criteria against which the 5. Examine the cost and financing needs.
enterprise is evaluated. If the planning process fails
to justify these results, the entrepreneur will abandon
the project. Minimum marketing criteria would be any
These stages are the same as the components of the
combination of sales volume and price that would business plan, so the information gathered during
result in a lower gross income. the feasibility study can be transferred directly to
the business plan, resulting in a more effective and
accurate business plan.
At this point, the entrepreneur should re-examine
the methods used to obtain the results. Here are FEASIBILITY PROCESS
some sample questions to ask in assessing the results. Figure 1 illustrates a process for conducting a
• Was the technique used appropriate for getting feasibility analysis. It can be altered according to
accurate results? the complexity of the project and the amount of
• Did the people surveyed accurately represent the risk involved, and is adaptable to any business
customer base? development situation.
• Do these cost figures represent accurately the cost
of production and distribution?

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Figure 1. Feasibility process flow chart.

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The Idea Technical Realities
Every idea has some merit and drawbacks. At this An assessment of the idea must consider the
stage, the entrepreneur will concentrate mostly on question, “Can it be done?” In other words, are the
the obvious benefits and limitations. entrepreneur and organization capable of producing
the product and taking it to the marketplace?
• Does the idea appear to meet set goals? Specific questions might include:
• What factors could prevent it from
• Is there access to the required raw materials?
being successful?
• What technology, equipment and processes
• Is the entrepreneur’s family prepared to make the
are required?
sacrifices necessary for this project to work?
• Do staff understand the required technology,
It is difficult to remain totally objective through equipment and processes?
this stage. A healthy level of scepticism allows the • Does it appear that the production system is
entrepreneur to discover the warning signs and workable and affordable?
pitfalls that can sabotage any good idea.
Criteria considerations:
Criteria considerations: • How much time can be devoted to this project at
• Are the benefits from this idea sufficient to justify the expense of other enterprises?
the cost in terms of finance, personal stress and • How much change is required to accommodate
family sacrifice? this project?
• What is the minimum ratio of benefits to cost • At what point is it not worth the effort?
that is tolerable?
Market Realities
Management Capabilities The success of any venture depends on the ability
Management experts agree that the most important to get the right product into the right marketplace
factor for success in any business is the management at the right time and the right price. The marketing
team that makes the decisions, yet it is the factor world is littered with failed products that could
most often overlooked in determining the feasibility have been successful if the formula for success had
of a venture. When beginning a feasibility study, been different. Effective market research is the most
consider the following: important activity an entrepreneur can undertake to
reduce risk.
• What management skills are lacking in order to
Key areas to research
have effective control over this enterprise?
• Can these skills be acquired? • features and benefits of the product or service
• What effect will involvement in this project have • target market (Who is most likely to buy?)
on the family and other enterprises? • distribution options (best way to reach the
• Will this new enterprise produce the lifestyle that target buyers)
I want for my family and myself? • market demand (How many possible buyers, what
volume and price?)
Criteria considerations: • competition (What products and
• What specific skills need to be developed or hired? companies compete?)
• At what point does the lack of available skills • trends (What is the expected life of the product?)
become an obstacle? • expected price (highest, lowest and most
• On a scale of 10, how much support is there from often prices)
family for pursuing this opportunity? • expected sales (volume and market conditions)

It is important to understand that customers rule

the marketplace. They alone determine whether the
product will sell in sufficient numbers and price to
be viable. Market research can reveal the probability
of product success.

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Criteria Considerations: Managing risk is a function of controlling the
• What are the minimum values on sales volume factors that contribute to possible losses against the
and price needed to be viable? investment. Feasibility analysis is a risk-management
• Is the potential for growth in sales adequate? tool because it helps the entrepreneur identify
• Is this product the best option available? the risk factors involved in the project. Other risk
management tools are those practices that contribute
Cost and Financial Realities to consistent quality and safety of the product
Each of the previous analyses generated information being sold or that contribute to a low unit cost
on anticipated costs and expected returns. Once of production.
this information is transferred to a ledger, three
statements can be created: The feasibility analyst might ask these questions:
• pro forma (projected) income and • What can go wrong with this project?
expense statement • Is there a way to prevent any of these
• cash flow statement from happening?
• opening balance sheet • What is the probability that any of these factors
will go wrong?
These statements are essential to creating a solid • What is the probability that two or more of these
business case to justify the proposed venture. In will go wrong?
the original goals, return on investment (ROI) • What will be the effect on the project and the
might have been stated. It is possible to calculate a family if they do?
projected ROI. • Can the effect of these risks be reduced through
insurance and at what cost?
The entrepreneur is seeking answers to the • How able and willing is the entrepreneur to
following questions: assume these risks?
• Does the profit level meet or exceed stated goals?
• Are the set-up costs within the range of Risk control is the utilization of systems that
financial options? minimize the effect of a negative occurrence.
• Will this proposal provide sufficient return
on investment? • Quality control and safety programs — reduction
• How will this investment affect net worth? of the risk of injury or harm to customers
• Production efficiencies — competitive advantage
Criteria considerations: through low cost of production
• Is the cost of sales acceptable relative to the • Thorough market research — improved chance of
product price? marketplace success
• Does the venture meet or exceed the profit goals? • Accurate cost estimates — improved accuracy of
• Does the expected return meet or exceed the estimating profit and return
minimum acceptable level?
• Is there a better way to reach my financial goals? Criteria Considerations:
• Do the risks involved in this venture exceed
Risk Realities the benefits?
Investments are made in the expectation of a • What specific risks need to be avoided
return to the investor. In general, the greater the or controlled?
return expected, the more willing the investor will • Is the cost of risk abatement through prevention
be to invest. People vary in their ability and their and insurance affordable?
willingness to take risks. The ability varies with the • What is the maximum amount of risk that can
extent of the cost and the wealth or asset value of be handled?
the investor. The willingness varies with the amount
of those assets that the investor is willing to place
at risk. These risks may be financial or social. In
either case, they can have a significant effect on the
entrepreneur and his or her family.

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WRITING THE BUSINESS PLAN SUMMARY
The information that has been collected to this Feasibility analysis can be conducted on any business
stage is sufficient to allow the entrepreneur to write proposal, from growing a new variety of sweet corn
a complete business plan. Business plan forms and to the building of a processing plant. The amount
electronic business plans are available wherever at risk determines the intensity and thoroughness
business books and software are sold. These may with which it is conducted. The quality of the
come in a variety of different formats, but all require information and analysis determines the accuracy of
essentially the same information. the resulting business case.

FINANCING THE NEW ENTERPRISE RECOMMENDED READING

The business plan is a key tool for obtaining Robert G. Cooper. 2011. Winning at New Products:
financing for a new business venture, but it is Creating Value through Innovation (Fourth
not a guarantee a financial institution will lend Edition). Product Development Institute
the necessary money to finance the capital and Inc., www.prod-dev.com.
operating costs of the enterprise. The information
acquired during the feasibility study will make
This factsheet was updated by Robb Wagner, Business
the business plan more attractive to investors and Opportunities and Market Strategies Specialist, OMAFRA,
lending institutions. Guelph.

There will be one more “proceed or abandon”

decision to be made at this stage. If several financing
sources reject the business plan, the entrepreneur
must re-examine the business case and decide
whether to proceed with the proposal. One option
is to review all sections of the feasibility analysis and
determine whether improvements can be made.
Another is to reject the idea completely and look for
a better idea.

Criteria Considerations:
• How much funding is needed to operate the
enterprise effectively?
• Should the business case be improved in order to
keep trying?
• Does this proposal put too much at risk?

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