Question

Chapter 18 Discussion and Lecture Comments

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The Rebuilding Decision

After Tom and Elise Ryan finished veterinary school in the early 2000s, they spent several years working for other veterinary clinics. By 2007, they felt it was time for them to start their own practice. They considered several towns in the south-central United States, 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 a 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 Elise’s parents and three brothers lived in Wardston. “If we failed, at least we knew we could get a good homemade meal,” said Tom.

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. Tom and Elise were still paying off $45,000 in student loans and had no savings to draw on. However, Elise’s parents agreed to deed them a house and tract of land to get started. Now a property owner, Tom was able to borrow $165,000 from a local bank. Tom’s family took out a home equity loan to help them complete the renovations. When the clinic opened in the summer of 2008, 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 Tom’s parents and make improvements to the clinic’s parking area. By 2010, the Wardston Animal Hospital had grown large enough to need another vet, and Dr. Laura Hyde joined the practice. She soon became an equal partner with Tom and Elise.

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 the break room all had to go down same central hallway. The partners always knew that they eventually wanted to build a new “ideal” clinic. Elise kept a notebook full of ideas and possible floor plans that they dubbed their “five-year plan.”

Then in April 2015 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 clinic 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 were 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 cleanup service to start the long process of recovery. The cleaning crew soon realized the extent of the damage and told the partners that the cleanup 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.

Tom, Elise, and Laura had to make a decision about how to proceed. As Tom 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 18-1

1. Are there other options that have not been considered? Explain.
2. How should the renovations or rebuilding be financed—debt or equity financing? Why?
3. What would you advise the veterinary partners to do? Why?
4. If the Wardston area suffered a major economic blow, what risks would the partnership face?

Answer 1

Answer 1 - The plans covered almost every option however there is still another option which can be a bit cost efficient as they can make another floor over the renovated structure with columns to support the new structure and the traffic issue would be solved, the building can have two distinct modules in a new structure which gives more space and distinct formations for staff and clients.

Answer 2 - The financing should have to be debt as equity financing means selling the assets that they own to a new partner which may or may not interfere with the decision making being a business ran by familiar people it is unwise to to sell a part of it to the unknown. Financially the banks would easily provide them loan as they have repaid all the loans they have taken till date. Additionally the business is long running and debt can be easily paid in a certain duration.

Answer 3 - I would advice the veterinary partners to use the insurance money and renovate the building as it will cost less and with the earnings in the following years start building a new hospital in the adjacent property without closing the current hospital as they will have their earnings in the meantime and the new ideal hospital will be built with their earnings in the coming years or so, they can also loan some amount from the bank and kick start their project simultaneously.

Answer 4 - The blow would be devastating if the company had some other form of business which are more susceptible to the economic risks, being a veterinary hospital the sicks animals need treatment no matter what the economic conditions are, however some losses are inevitable and if they are debt free the earnings will be less. If they are debt ridden payments may default. However the industry does not directly depends on the economical up downs they would be alright during that phase if they just use the insurance money and renovate the old building.