Museums can be set up either as for-profit or non-profit institutions. The for-profit museum is looking to generate income in excess of expenses, and invites the interest of museum investors who would like to participate in the museum’s growth. Museums find investors from the usual candidates: wealthy individuals, estates, mutual funds, pension plans and hedge funds. All of these investors require suitable documentation and disclosure by a museum before they write a check. The most fundamental document for organizing and initiating the funding of a new for-profit museum is the feasibility study.
A feasibility study offers market and financial analysis, financial projections and physical planning recommendations. The design plans of the museum must be congruent with the projected market size and cash flow; otherwise the museum may be underfunded. In any feasibility study, the maximum warranted development costs will be stated, which becomes the de facto construction budget.
In order to successfully complete a museum feasibility study, the following nine steps are typically required:
- An Orientation Meeting – This kicks off the discussions in some detail and includes a tour of the prospective site, if one has been chosen.
- Site/Area Evaluation – Many factors must be taken into account, including market proximity, physical constraints, access, traffic, nearby development and local competitive or complementary facilities.
- Introduction – The study will need to describe the type of museum being planned, and the larger industry to which it pertains. Trends that affect the museum should be discussed here.
- Market Analysis – Market areas are identified based upon proximity to the museum site. Demographics of these market areas are analyzed to confirm the potential for sufficient support of the museum. Such factors as population growth, age and income distribution, size of the tourist market, historic growth of the tourist market and other characteristics.
- Evaluation of Similar Facilities – It is desirable to survey similar properties to ascertain their identity, physical description, financial performance and development costs.
- Yearly Usage – The study estimates the annual museum usage for the first five years of operation. Factors that are examined include the planned components, market size, market characteristics, market penetration from similar facilities and location/competition issues.
- Physical Planning – The physical plan for the museum must be scaled to correctly reflect expected market demand. For large projects, you will need a master plan and schematic designs. The following parameters must be specified: design capacity, types of activities, activity mix and sizing, visitor service space, parking facilities and the minimum land needed.
- Financial Analysis: revenues by category, operating expenses, operating expenses, profit and return on investment projections for the first five years.
- Warranted Development Cost: how big a budget is warranted, and what has it cost to construct similar facilities. Comparisons with existing museums, adjusted for size, will help dictate whether the business plan is feasible.