[Frank’s original draft is included below.]

WHAT IS A FEASIBILITY STUDY?

Feasibility is a funny word, often quite misunderstood.  The definition according to the Business Directory (www.businessdictionary.com/definition/feasibility-study.html):

“An analysis and evaluation of a proposed project to determine if it (1) is technically feasible, (2) is feasible within the estimated cost, and (3) will be profitable.” Feasibility studies are almost always conducted where large sums are at stake. Also called feasibility analysis.”

Sadly, a huge majority of entertainment developers and even those veterans who have been in business for decades, often do not know the precise demographic makeup of their target markets.  How often (about 5 times per week) do I hear the same sentence from well-educated and savvy business men and women: “There is nothing for kids to do around here.  An entertainment center will be profitable!”  Nothing could be further from the truth.  There is always a lot of things for kids to do and grown-ups usually do not fully understand what the competitive options include.

WHAT IT IS NOT HELPS DESCRIBE WHAT IT IS.

However, it is not just a peek into whether or not a business will succeed or fail in a particular market or at a specific location. It is not a “yes” or “no” document. What it is, is an in-depth market analysis of what combination of attractions and services in a right-sized facility will produce the highest net profit (or return on your investment) within a budget that you can afford.  A good study also includes a construction budget as well as at least 4 years of projections with all figures being backed up and fully supported.

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IT FOLLOWS A FORMULA

The first thing to realize is that if there isn’t an entertainment center in your market, there are very good reasons why.  For example, if there isn’t a mall in your area, that market is too small to open a larger than average family entertainment center. When malls were doing well a decade or more ago, the developers in that industry knew quite well how many people it took to support a mall.  For family entertainment centers in A, B, or even some C markets, when you drill down the visitation data, today, it only takes about 33,000 individuals visiting your entertainment center an average of 3 times per year (100,000 visits) and spending an average of $10 per capita to generate $1,000,000 in gross revenue (100,000 x $10 – $1 M).  This is a good benchmark to use just as a starting point.

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If you have a higher per capita spending rate in your area, all the better. If you are the only entertainment center in a small market and you provide great service and great value, you have a good chance of ‘scaring off’ the competition and remaining successful long term.  However, if you do have entertainment center competition in your market, then it would require a population of at least three times 33,000 or close to 100,000 within a 20-minute drive time for you go have a good chance of grossing that same $1,000,000.

Drive times along the market’s main roads are a far more accurate measurement than using circular mile rings (measured outward with your facility being in the center) to break down the three primary target markets (0-5 miles, 5-10 miles, and 10-20 miles) and noting that approximately 90% of the revenues will come from within a 10-mile drive and as high as 60% coming from within a 5-mile drive.

Drive Times For 3 Target Markets

WHEN DO YOU NEED A FEASIBILITY STUDY?

You need a feasibility study when you are investing more money than you can afford to throw away and when you are borrowing money from friends, family, or 3rd party lenders and you expect them to actually write you a check rather than just say they will.  You also should have a feasibility study done (a short version) after every 5 years you are in business.  The reason is that market demographics change, peoples tastes change, other competition comes, and your facility may require a different makeup of attractions and services.

WHEN SHOULD YOU GET A FEASIBILITY STUDY?

The answer is three words: ‘as soon as possible’.  I say this in all candidness.  We teach at Foundations Entertainment University (foundationsuniversity.com) that the family entertainment center industry is ‘counter-intuitive’ to what the average industry outsider thinks.

When they visit a busy entertainment center on a Saturday, for example, they have the impression that the business is printing money.  They do not realize that 1/3rd of the weekly gross revenues are most often earned on Saturday.  They do not know what rent and investment the owner has, nor how much interest is paid each month.  They do not know if the owner is maximizing or wasting advertising dollars.  They do not know where the customers are coming from nor how many times per year each one visits.  They do not yet know how fast their young children will get bored and want to go elsewhere.  They do not yet know what is like to be the parents of teenagers.  And the list goes on and on of what they do not know.

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Conclusion:  A feasibility study can show what FEC developers don’t know about a market and would not have even guessed. This information can often mean the difference between success and failure.

As always……keep cranking!!!

Feasibility Study Frequently Asked Questions & Answers

All Feasibility Studies Are Not Created Equal

By Jerry Merola ([email protected]) and Frank Seninsky ([email protected])

Amusement Entertainment Management (AEM)

Amusement Entertainment Management, LLC, we offer a full range of consulting services, including early-stage feasibility analysis, business plan development, funding assistance, and conceptual design and layout services.

Quite often AEM receives calls from new entertainment developers who are concerned about the quality and validity of feasibility analysis work they’ve received from other consulting entities.   While there might not be much of a difference in the quality of say, paper clips purchased from various retailers, there are vast differences in the quality and effectiveness of consulting and market analysis services.  Below are some questions that users of market analysis services should ask themselves:

Is Your Firm’s Feasibility Report Accredited By Major Financial Institutions?

AEM’s work is accepted and accredited by some of the largest names in the financial services industry, including GE Capital, Direct Capital, Firestone Financial, CIT Group, CNL Realty Income Corp. the Small Business Administration, the United States Department of Agriculture, and The Economic Development Authority.  Accreditation means that these entities have previously examined and accepted such work as independent evaluations, and are prepared to rely upon the findings outlined within them.  Our academic achievements, years of industry expertise, and a tremendous network of entertainment operators and financiers have helped to make AEM the “go to” source for entertainment development.

How Are Your Projections and Estimates Supported?

Projections generated by AEM are based on ACTUAL performance data generated from more than 400 entertainment venues across North America. Our real-time database is updated every 7 days and is segregated according to regional trends, changing market conditions, and select entertainment styles. By using actual performance data generated in regional markets, AEM’s estimates can more appropriately be relied upon by lenders and investment firms alike.

Are Capital Budgets Included Within The Report?

The only effective method by which to appropriately analyze an entertainment project is to develop a capital budget that contains all anticipated costs and development expenses.  AEM develops the industry’s most comprehensive budgets, largely the result of our firm’s constant involvement in developing projects for some of the biggest names in the entertainment business.

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Who Will Work On My Project?

No one appreciates becoming ‘a number’.   At AEM, we pride ourselves on personal service. While our research teams typically include five or more members per assignment, your direct contact always remains with Jerry Merola or Frank Seninsky.    Jerry and Frank are involved in every aspect of report development, including on-site visitation, research coordination, and client follow-up.

Who Can I Turn To After My Assignment Is Completed?

Many firms have a tendency to miss the most critical step in the relationship process – helping the client down the road.  At AEM, our door is always open.  We stand ready to assist our clients throughout the development process.  In fact, more than 90% of our clients continue to work with our firm right up through the opening of their facility and 90 days thereafter. AEM also has a ‘coaching/mentoring’ program that continues on a weekly basis. Our portfolio of clients includes relationships that started more than thirty years ago, a testament to our continued commitment to our clients and their entertainment projects.

What Is Included in Your Fee Schedule?

Be careful of hidden fees.  Many firms view a market feasibility analysis as a ‘limited scope’ assignment, providing only limited information during the initial engagement.  At AEM, our market investigation process is only done one way – full scope.   Lenders and investors today expect extreme diligence to be done in underwriting costly, new entertainment projects.   They expect independent analyses that are complete and thoroughly investigated.  AEM’s fee quotes are all-encompassing, including travel and lodging expenses, report development and duplication, and even online hosting of your completed study.

What Are Lenders Looking For?

In general, lenders will want to look at the entire project cost, including building contents and attractions.  Most projects that we are involved in require equity of 20-25% over two separate debt facilities:

Mortgage – typically 15-20 year amortization (land and building).  Rates are generally not a function of the prime rate but instead fixed against the Federal Funds rate + 250 basis points.

Term Debt – typically 7 – 10-year amortization  (attractions and contents).  Term debt is usually priced at prime plus 2%.