DRUTHERS FORMING LIMITED
Julie Harvey revised this case, originally written by Mitch Orr and John Graham, under the supervision of Elizabeth M.A. Grasby solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail firstname.lastname@example.org. Copyright © 2009, Ivey Management Services
Version: (A) 2009-11-10
On July 30, 2007, Brad MacDougall, account manager at the Canadian Commercial Bank (CCB) in Barron, Ontario, reviewed his latest loan request. Garrett Sheppard, co-founder of Druthers Forming Limited (Druthers) and a long-time CCB customer, was requesting a $350,000 loan to construct a new building to house Druthers’ existing operations. Construction was already well underway, with a completion date set for September 30, 2007. MacDougall noted that Druthers was currently operating without a line of credit, and he wondered whether the business could generate enough cash to cover all expenses, including the new loan payments, if approved. With his desk covered in financial and company data, MacDougall knew he must give Sheppard an answer by early next week if construction was to continue on schedule.
Druthers Forming Limited was founded in 1987 by two brothers, Garrett and Norm Sheppard, and one other investor. When a third brother, Jack, joined in 1995 and replaced the other investor, Druthers became the Sheppards’ second entirely-owned-and-operated firm. The other family business was Jack Sheppard Homes Ltd. (Sheppard Homes), a construction company that had been in business since 1964. Druthers, originally established to serve the needs of Sheppard Homes, specialized in the construction of poured concrete foundations for residential buildings, which was the first stage in building a home. In the late 1980s, Jack Sheppard observed that demand for foundations far outstripped supply in the region, and long waits for foundation construction had become standard. Furthermore, one of the three firms that had been serving the existing market was winding down its operations and getting out of the foundation business. In an attempt to circumvent these obstacles, which were causing numerous lengthy delays in the construction of Sheppard Homes, the brothers started their own foundation company, Druthers Forming Limited. Whenever possible, Druthers also sold its services to other housing contractors who were anxious to have their foundations poured on schedule and to individuals building their own homes. The company’s principal target market was Barron and areas within a 45-kilometre radius of Barron Township.
During its early years, Druthers competed in a lucrative subset of the construction industry. Volume and market opportunities were very high due to the lack of competition in the area. However, by the late 1990s, there were several firms that offered similar foundation services. The steady increase in competition since then had driven prices downward and reduced profit margins in recent years. (See Exhibits 1 to 5 for historical financial statements and selected company and industry ratios.) THE DRUTHERS AND SHEPPARD HOMES RELATIONSHIP
Sheppard Homes built primarily single-family dwellings. Several other local construction firms served the multi-family residential sector, which...