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Bonus cases

Bonus case 13-5

THE REBUILDING DECISION

After Rob and Janet Colton finished veterinary school in the early 1990, they spent several years working for other veterinary clinics. By 1997, they felt it was time for them to start their own practice. They considered several towns in the south central U.S., visiting local chambers of commerce and studying each town’s demographics. They finally settled in Wardston, a small city in Arkansas. Wardston is a regional center for the surrounding counties, located at the intersection of two major cross-state highways. The industry rule of thumb is that it takes a population of 1,500 pet owners to support one veterinarian. Wardston appeared to be an underserved area, and no other veterinarian in the area was treating large animals. A big factor in their decision also was the fact that Janet’s parents and three brothers lived in Wardston. “If we failed, at least we knew we could get a good homemade meal,” said Rob.

They bought an abandoned veterinary clinic with a three-quarter acre plot of land on the major thoroughfare. The clinic, a sturdy 2,000 square foot cinderblock structure, had been constructed in 1950 and needed major renovations. Rob and Janet were still paying off $45,000 in student loans and had no savings to draw on. However, Janet’s parents agreed to deed them a house and tract of land to get started. Now a property owner, Rob was able to borrow $165,000 from a local bank. Rob’s family took out a home equity loan to help them complete the renovations. When the clinic opened in May of 1998, the small concrete building had been transformed into the Wardston Animal Hospital, a 4,000 square foot veterinary clinic, complete with treatment room, surgery, kennels, and offices.

As they had anticipated, the area badly needed another vet clinic, and business began to boom. They were able to pay off the loan from Rob’s parents and make improvements to the clinic’s parking area. By 2000, the Wardston Animal Hospital had grown large enough to need another vet, and Dr. Wayne Harper joined the practice. He soon became an equal partner with Rob and Janet.

The clinic building, while adequate for a small practice, was still half a century old with an inconvenient traffic flow. The building was designed around a single center hallway going from north to south. Clients going to exam rooms, animals being weighed, vets heading to treatment rooms, staff going to break room all had to go down same central hallway. The partners always knew that they eventually wanted to build a new “ideal” clinic. Janet kept a notebook full of ideas and possible floor plans that they dubbed their “five year plan.”

Then one April afternoon in 2005, a line of severe thunderstorms passed through the city. It was a Wednesday afternoon, the clinic’s early closure day, and the staff—with the exception of the office manager—had left the building. At 3:00 p.m., a tornado dropped out of the squall line and plowed through the northern part of the city, tearing the roof off the Wardston Animal Hospital and wrapping it around several nearby pine trees. For three hours, a steady downpour flooded the damaged building, leaving six inches of water on the treatment room floor. Worse still, the rainwater soaked into the insulation in the walls, the sheetrock on the walls, and the ceiling tiles. Volunteers, staff, even other veterinarians flocked to the clinic to help ferry the boarded animals to temporary homes and clean up the shredded interior. None of the animals was hurt, and no one was injured, although the clinic office manager was in shock for a few days.

Within two weeks, the partners were back in business, operating out of a doublewide trailer set up on the north side of the parking lot. They hired a clean-up service to start the long process of recovery. The cleaning crew soon realized the extent of the damage and told the partners that the clean-up would be very costly. They also warned that the soggy walls and ceiling would probably have mildew problems in the future no matter how thoroughly the building was cleaned.

Rob, Janet, and Wayne had to make a decision about how to proceed. As Rob saw it, there were four options to consider:

Plan A: Restore the building to its existing condition before the tornado. The $150,000 insurance settlement would just cover the renovation costs. This option would be the least costly, but they would still have the same 55-year-old building with the same bad traffic flow.

Plan B: Gut the old building and create the “ideal” building within the old shell, total cost approximately $400,000.

Plan C: Level the old building and rebuild on the site. This option was almost immediately eliminated for several reasons. First, the cost just to demolish the building would be $50,000. Also, the clinic staff was using undamaged parts of the old building for kennel space and storage. The doublewide trailer alone would be inadequate to support the practice if the old building were immediately demolished.

Plan D: Build the clinic of their dreams on land the partners owned adjacent to the clinic. The clinic would take almost a year to complete at a cost of $650,000.

discussion questions for BONUS case 13-5

1. ARE THERE OTHER OPTIONS THAT HAVE NOT BEEN CONSIDERED? EXPLAIN.

2. What would you advise Drs. Colton and Harper to do? Why?

3. If the Wardston area suffered a major economic blow, what risks would the partnership face?

answers to discussion questions for BONUS case 13-5

1. ARE THERE OTHER OPTIONS THAT HAVE NOT BEEN CONSIDERED? EXPLAIN.

Students can develop other options. The veterinary partners did not consider moving to another location, for example.

2. What would you advise Drs. Colton and Harper to do? Why?

This case is based on a real incident. The partners decided to go with plan D, financing the new clinic entirely with a bank loan. “Rob” believed that the growing practice and influx of Katrina pet owners into the area would enable him pay off the loan without problems.

Right after the tornado, “Rob” put an inexpensive roof on the old building to protect it from further damage. He decided to donate the old clinic to the local animal rescue league, which badly needed the kennels and the office space. Generous and ethical behavior….and a nice tax deduction.

3. If the Wardston area suffered a major economic blow, what risks would the partnership face?

Borrowing funds to build the new clinic creates a legal obligation to repay the loan. If a major economic blow occurred, the partners would run the risk that revenues generated will not cover the monthly loan payment.

This case is an actual situation. For months, I listened to my friend Bob (“Rob”) go through the all the angst and indecision about the veterinary clinic’s future. At some point, I pulled out a pencil and started taking notes. A few weeks later, I sat down with him to get more information for the case. He spent two hours giving me all the details, some very private, about financing the clinic. It was an incredible opportunity to create a decision-based case.

The outcome: The partners decided to go with plan D, financing the new clinic entirely with a bank loan. Bob’s choice was partly based on an industry study that found that a new veterinary facility causes an average revenue bump of 20%.

The new building was built quickly, and they moved into the new clinic facility 16 weeks after the storm, The revenues for the new clinic were a little less than anticipated in the year after the move. The clinic is operating profitably, however, and paying down the bank loan.

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