Chapter 4 Starting the Commercial Recreation Enterprise: On-Line Lesson

Terms:

Preliminary Considerations

Source: MoreBusiness.com

Visualizing a Business Table - Four Foundational Legs for a Successful Recreation Business

Rewards of Starting a Commercial Recreation and Tourism Enterprise

Risks of Starting a Commercial Recreation and Tourism Enterprise

Feasibility Study vs Business Plan

A feasibility study is an analysis and evaluation of a proposed project to determine if it is technically feasible and profitable, whereas a business plan summarizes the firm's operational and financial objectives and how they will achieve these.

Reasons for Conducting a Feasibility Study

1) To establish feasibility - deciding whether or not the business project will realize a return on investment.

2) To formulate the optimum concept - finding the best facilities, location, scale, and market orientation for success.

3) To assist in establishing management and marketing guidelines - deciding useful operational strategies.

4) To assist in obtaining funding - creating data that can be used in a business plan for lenders and investors to study.

Chapter 1: Description of the Business

     Established market: a market where the consumers already exists in geographic area to be served. Both supply and demand can be measured.

     Created market: a potential market, but it does not currently exist. It is difficult to assess the potentiality of the market.

Life Cycle of the Industry - Preferably a new business would enter a market when the product or service is in the Introductory or Take-Off stages.

Competitive Differentiation - A way to differentiate your businesses product or service from others to gain a competitive advantage. Ways to differentiate your product or service include the following:

Image and Market Platform

Image: the way people think about a business: promotional efforts; physical layout; staff courtesy.

Market Platform: a concise summary of the key elements of the corporate image and competitive difference.

Example of a Market Platform: Welcome to The Ritz-Carlton, Naples! Our goal is to provide the finest personal service in surroundings that are warm, relaxed yet refined.

Forms of Legal Organization - Each legal form has advantages and disadvantages. The best choice for a specific business depends upon a variety of circumstances including the entrepreneur's financial condition, type of business, number of employees, risk involved, and tax situation.

Sole proprietorship: a business owned and operated by one person. The simplest and least expensive form for an individual to start. Owner is personally responsible for all debts, taxes and liability.

General partnership: an association of two or more individuals as co-owners. All partners have unlimited personal liability.

Limited Partnership: Similar to the general partnership except there are two classes of partners.

Corporation: Is a separate legal and taxable entity that usually relieves the owners of liability. It is the most complex form of organization.

S Corporation: "Subchapter S Corporation" is a normal corporation, but who’s stockholders may not number more than 35, have limited liability and report profits on their personal taxes. S Corporations are limited to one primary area or endeavor.

Limited liability company (LLC) - is an unincorporated business entity that is a cross between a corporation and a partnership. Like a corporation, an LLC protects its members from personal liability for the debts and obligations of the company, but an LLC is taxed as a partnership.

* The LLC is becoming the preferred legal entity for small businesses, instead of partnerships and S corporations..

Chapter 2: Regulatory and Risk Analysis

Regulations, taxes, and licenses vary for different types of businesses and from state to state.

Regulations, Taxes and Licenses

Regulations

Administration - Occupational Safety and Health Administration (OSHA)

Taxes

Licenses

Disclosure Requirements - Individual(s) planning to start the new business have any legal or financial liabilities that might negatively  affect investors, these issues should be disclosed.

Risk Management and Insurance - Adequate insurance coverage is a pre-requisite for most loans or other financing, lease agreements or carrying certain products of certain suppliers.

Common forms of insurance include:

Chapter 3: Location Analysis

There are opportunities and challenges related to the virtual and physical location of a business. The virtual and physical business location facilitates consumer purchasing and may give a competitive advantage.

Two Step Process

1) Selection of a general area - based on assessment of the full market potential (overall demographics; community environment; business environment).

2) A specific site within the general area is selected.

Chapter 4: Management Analysis

The feasibility study must address how the project will be managed. The following areas should be specifically addressed.

Organization -

Staffing -

Major Operational Considerations -

Chapter 5: Market Analysis

Market analysis questions:

2) What are their needs?

3) How often and how much do they purchase?

Market Segmentation: a market segment is a group of people with some common characteristics that make a difference in their purchasing behavior. Market segments can be based on socio-demographic characteristics, behavioral characteristics,  or geographic characteristics.

Socio-demographic variables: includes: age, gender, family stage, income, education, occupation, ethnicity, and marital status.

Behavioral Characteristics: includes: level of use, skill level, benefits sought, psychographic profile (Allocentric vs Psychocentric).

Geographic Characteristics: includes: place of residence, location of facility.

Stats, Stats And More Stats

Within the growing participation of "canoeing," Canoe & Kayak's statistics reveal a 56-percent increase in kayak touring and a 34-percent increase in whitewater kayaking. Over half (56.3 percent) of participants are male, between 25 and 30, married (75 percent), college educated (83 percent), working in professional/managerial careers and earning more than $60,000 annually.

Eighty-two percent of participants choose the canoe as their vehicle of choice for camping (83 percent), Fishing (59 percent) and hunting (23'percent), and pay an average price of S800 for a canoe. The majority (74 percent) purchase their boats at a paddlesports specialty shop and 70 percent spend more than six days per year paddling.

The whitewater kayak is the choice of 24 percent of participants, who pay an average price of $600. And, 78 percent buy them at a paddlesports specialty store. Sixty-five percent paddle less than 10 days a year, but they are twice as likely than the canoe paddler to buy related clothing and gear.

Kayak touring, the fastest growing paddling market segment, attracts 38 percent of participants. They pay an average price of $1,100 for a sea kayak. and 82 percent buy them at a paddlesports specialty shop. Thirty-nine percent spend more than 10 days paddling a. year and they are three times more likely than the canoe buyer to purchase related clothing and gear-

The paddlesports participant is sprinkled generously in all geographic regions of the United States, and also enjoys other outdoor activities, including camping, backpacking/hiking, fishing and photography of wildlife. Are you targeting this potential market in every way possible?

For a copy of the 1995 Paddlesports Market Overview, contact Canoe. & Kayak at 8001MYCANOE.

(article appeared in Outdoor Retailer magazine)

Canoe & Kayaking Market Profile

Market Profile / Target Market

Stay on Target is an excellent article on how and why it is important to know your target market. Even though it was written for a Health and Fitness Club, marketing is marketing, the concepts apply to any type of business.

Additional Reading: Stay on Target

Recreation and leisure services, programs, activities and products are created to meet the needs, wants, and desires of people. These needs, wants, and desires continually change based on the individuals 4Cs (core, culture, choice, and change). These may be represented by specific socio-economic characteristics or variables also referred to as people descriptors. Certain individuals are attracted to specific recreation and leisure services, programs, activities and products based on factors found in the 4Cs, but they may also be identified as a group that share these specific consumer behaviors or characteristics, this grouping represents a Market Profile or Target Market. See Stats, Stats and More Stats above. 

Additional Reading:THRASHER magazine market profile.

4Cs

Core: central and unchangeable elements of individuals (age, stages of development, gender, race, and ethnicity).

Culture: societal factors including the decade of our birth to our educational level and other culture factors influence the needs, wants, and desires we develop (cohort, household status, religion, education, income, occupation, and geographic location).

Choice: characteristics based on individualism, changes in social norms, technology, and economics (individual values and attitudes, expectations, behaviors, and lifestyles).

Change: life changes based on biological, cultural, economic, demographic, health or attitudes which impact consumer behavior (health, life stages, life events, and seasonal fluctuations).

Sources for socio-demographic information: this is used to create a market profile. (I am not suggesting you buy any data sets for your project. I am only putting this here as an example of sources available to create a market profile. Similar information is available from the US Census Bureau at no cost.

usa.data.com and demographics.com/catalog

Competition Analysis

Competition in commercial recreation and tourism usually occurs as either brand level or product level.

Brand Competition: Other businesses which offer the same product or service as your business.

Product Competition: are other businesses which offer different products or services which may be substituted for the ones your business offers.

Competition analysis should lead to the formulation of marketing strategies to exploit the competition's weaknesses and enhance your businesses strengths.

Market Positioning

A decision process that helps business managers decide the best product or service niche and marketing strategy for their business. This process is based on three considerations:

1) internal analysis - available resources, organizational constraints and the company's philosophy and values.

2) market segment benefit analysis - an analysis of the benefits that the market segment values most in the particular product/service.

3) competitive analysis - differentiate the business on the basis of the competitive analysis.

Demand Projection

Probably the most difficult part of the market analysis and the entire feasibility study is projecting demand for a given product or service. The most common demand methods are listed below:

	Application of Standards: a criteria based on the ability of a given population to support a specific type of business (one golf course per every 25,000 people). See Parks, Recreation and Open Space Standards and Guidelines. NOTE: Do not use this method for the Feasibility Study/Business Plan.
	Comparable Project Method: An existing recreation business in an area of similar demographics is compared to the project under study. Identifying the participation rates and expenditure averages for an existing business.
	Trend Analysis: Projecting future demand based on history of demand. This is a very difficult demand method to calculate. NOTE: Do not use this method for the Feasibility Study/Business Plan.
	Participation Rate Projection (AKA survey of buyer intentions): Using national survey data which identifies consumer behavior for different products or services. Then based on the national participation rates the demand for local consumption may be determined (5% of adults belong to a private tennis club, therefore in a local population of 100,000, 5,000 would be the potential market demand.           Consensus methods. A groups of experts in the same or similar field are asked to give their opinion about the likely sales of the new product or service. NOTE: Do not use this method for the Feasibility Study/Business Plan.           BBA help. The U.S. Small Business Administration offers a tool titled SizeUp (www.sba.gov/tools/sizeup ) that locates potential customers and competitors and identifies areas where there should be high demand and little competition.

Determination of Market Share

Once the demand for your business is estimated, it is unlikely that the new business would capture the entire market.

Market Monopoly: occurs only if a new business is the sole provider for a new product/service (not usually the case).

Expected Market Share: divide your business capacity by the total (same types of businesses) in the area. Example: if there are four bikes shops and you open a new bike shop you could expect to capture 1/5th or 20% of the market.

Feasibility Study Example: If you have a comparable demand, for example, from an existing bike shop of $140,000 in yearly gross sales, and there are currently 3 other bike shops in the same town, you would multiply $140,000 x 3 = $420,000 to get the total market sales for bikes in this town. Then to apply the zero sum, divide $420,000 by 4 = $105,000 to get the projected total sales for your new bike shop business.

Fair Market Share: It is unreasonable for entrepreneurs to expect their new business to gain its expected market share immediately. Instead, they can estimate its initial FAIR SHARE of the market by factoring the expected share downward. Depending on the current market an initial fair share may be 50% or less than the expected.

Strengths, Weaknesses, Opportunities and Threats (SWOT)

SWOT is an analysis that reviews an organization's current market position and evaluates market potential.

Strengths - Strengths are areas that managers can take advantage of now or in the near future. They include facilities, management support, community image and strong programs.

Weaknesses - Weaknesses are areas that need improvement and can be changed.

Opportunities - Opportunities are areas where managers can seek to grow in the market. These may be the addition of new facilities or changes in the competition's fees and charges.

Threats - Threats include anything that can negatively impact your business. These may include a new competitor or a poor economy.

Performing a SWOT analysis of every profit center can result in new creative ideas to improve facilities or programs, take advantage of strengths or develop new marketing strategies.

Chapter 6: Financial Analysis

The financial analysis is based on information presented or considered in all of the previous sections of the feasibility study. The concept, product/service, operating structure, and location of the business will help determine the costs involved in starting and continuing the enterprise.

Golden Rule: Be liberal in estimating expenses, and be conservative in estimate revenues.

Revenue Projections: Based on "per capita" (per person) expenditures which are estimated in the demand analysis.

Start-Up Costs - these include the expense of initiating the business, financing capital facilities and equipment, and covering pre-opening costs.

	Business initiation expenses: include legal and professional consultants, insurance, incorporation expenses, tax deposits, licenses and permits, cost of obtaining loans.
	Capital expenses: include land and buildings, major equipment, vehicles, machinery, remodeling and decorations, fixtures, displays, and signs.
	Pre-opening operations: include (1 to 3 months) salary for owner/manager, utility deposits and installation, salary for key employees, utilities and telephone, Internet access, staff training costs, supplies and equipment, initial inventory, purchase, initial maintenance, advertising and 10% cash reserves.

Operating Costs

Operating costs are expenses to keep the business operating once if has opened. These should be estimated on a monthly basis. Since for many businesses expenses occur at irregular intervals throughout the year, the manage cannot simply distribute the estimated expenses evenly throughout the 12 month.

Revenue Projections

Revenue projections should also be made on a monthly basis. Revenue projections are made by multiplying the expected number of customers (from the demand analysis) by the average per person revenue figure.

Financial Pro-Formas

Pro-formas are detailed projections for the future. See Chapter 5 Financial Marketing and online lesson.

Four types of pro-formas are:

1) Profit and Loss Statement

2) Cash Flow Statement

3) Balance Sheet

4) Break-even Analysis

Chapter 7: Feasibility Recommendation

Based on the financial analysis and consideration of the risks and assumptions, entrepreneurs can make a decision regarding the viability of the project. Four basic decisions can be made:

1) proceed with the project, contingent upon funding

2) to amend the project and seek funding

3) to amend the basic concept and conduct a new feasibility study

4) terminate the project

These decisions are based on the basis of expected return on investment (ROI) to the owners.

Executive Summary and Cover Letter

The executive summary may be the most important part of the feasibility study. It could be placed before Chapter 1. It is the first document a reader sees and it must be effective or the rest of the document may not get read.

In only two pages, the executive summary explains the fundamentals of the proposed business. It briefly explains the product or service, the market, the reason the business will be successful, a summary of the financial statements, the basic recommendation about how to proceed, and support for that recommendation. It is the last part of the feasibility study the entrepreneur will write.

Financing the Venture

After completing the feasibility study, the entrepreneur must secure adequate financing for the enterprise.

Advantages and Disadvantages of External Funding

Advantages

	starting the business now
	starting with a larger financial base
	distributing part of the risk to others
	people who provide financial assistance want the business to succeed

Disadvantages

	cost of financing
	personal liability for failure
	some advice from investors may be conflicting or wrong
	one's own business is a commitment that is difficult to walk away from
	there is pressure to succeed

The C's of Credit

A wide variety of factors are considered when making a decision regarding financing a new enterprise.

	character
	clarity
	capacity
	capital
	collateral
	concept
	conditions
	contingencies
	competition
	circumstances

Financial Sources

Four key questions related to financing:

1) Exactly how much money is needed?

2) How will the money be used?

3) How and when will the investment be repaid?

4) Can you afford to cost of financing?

Financial Sources

There are three primary approaches to financing a new business: personal sources, debt financing, and equity financing, each has it's advantages and disadvantages.

Personal Sources: Savings, property, and family. Surveys show that 75% to 82% of the funding to start a new business comes from personal sources.

Debt Financing: is the securing of money through a loan. Entrepreneurs are usually required to provide 10% to 60% of the funds necessary to start a company before a lender will consider a loan. Banks and credit unions. Commercial Finance Companies, Insurance Companies, Home mortgage holders (Home equity loans), Vendors, Dealers of major equipment and vehicles (rentals and leases), Small Business Administration (SBA), Small Business Investment Co. (SBIC), Alternative lenders (Biz2Credit, Can Capital, OnDeck), Internet loan sources (crowdfunding, gofundme), Credit cards.

Equity Financing: the entrepreneur gives up partial ownership in return for start up funds. Limited partnership, venture capitalist, small business investment companies (SBIC), Public Stock Offerings (PPO), private placement memorandums (PPM).

Alternatives in Starting a New Business

Franchise: permits the operator to sell the products/services of the franchiser. Advantages: economy of scale, management assistance, promotions.

Buying and Existing Business: Review all sales and marketing data for the past five years. Sale price 5 x the last years sales.

Small Business Incubators: facilities that are created to encourage new businesses by sharing rent, and office help which results in a low overhead.

Core Product Extensions at Existing Business: Good for small specialty businesses.

Cooperative Ventures (Public-Private): Joint business opportunities between public (federal, state, city or county governments) and private enterprise.

 

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