Case Studies in Aboriginal Business

The Purdy Crawford Chair in Aboriginal Business Studies was established at Cape Breton University in 2010 in response to Aboriginal community leaders’ expression of the need for entrepreneurship, business investment, and corporate skills training for the purpose of creating a model of self-reliance.

Named in honour of Canadian lawyer and corporate boardroom leader, the late Mr. Purdy Crawford, the Chair aims to promote interest among Canada’s Aboriginal people in the study of business at the post-secondary level.

The Purdy Crawford Chair in Aboriginal Business Studies focuses its work in four areas:

• Research on what “drives” success in Aboriginal Business• National student recruitment in the area of post-secondary

Aboriginal business education• Enhancement of the post-secondary Aboriginal business curriculum• Mentorship at high school and post-secondary levels

“ Meaningful self-government and economic self-sufficiency provide the cornerstone of sustainable communities. My wish is to enhance First Nations post-secondary education and research to allow for the promotion and development of national Aboriginal business practices and enterprises.”

Purdy Crawford, C. C. (1931-2014)

Purdy Crawford Chair in Aboriginal Business Studies

Shannon School of BusinessCape Breton University

1250 Grand Lake Rd, Box 5300Sydney, NS B1P 6L2

©2015

www.cbu.ca/crawford

Pratt Falls Salmon Lodge by Ken Medd 1

PRATT FALLS SALMON LODGE Dwight Lethbridge and two partners borrowed heavily to purchase a remote Labrador fishing lodge in April 2009 and financed the lodge’s first season on credit. In September 2009, after the season had ended, the credit union advised that payment in full was due by the end of October. Dwight and his partners needed a strategy to quickly address the situation. DWIGHT LETHBRIDGE Dwight Lethbridge is a member of NunatuKavut (formerly the Labrador Metis Nation). His family had operated a hotel in Cartwright, Labrador for decades and Dwight had managed it since 2000. The hotel had 20 guest rooms, a restaurant, meeting rooms, and other amenities. It employed 10 or more people, depending on the season. In 2009, Dwight was in the middle of a major renovation to the hotel, which included upgrades to the guest rooms, new air conditioning and heating, new windows and doors, new insulation and siding, and a new roof. The renovation was vastly over budget. THE LODGE In a chance encounter, Dwight learned that a fishing lodge on the Eagle River in Labrador was for sale. He had fished the river since he was eight years old and was well acquainted with it and the lodge. The lodge had been established in the 1960s and, in 2009, it was owned by a company from Goose Bay, Labrador. It was located only 40 kilometres away from Cartwright by water, but was in a remote wilderness area and only accessible by boat or plane. The site contained six buildings. The main building housed the kitchen, the guests’ dining and common room, private rooms for the house staff, an office and bedroom for the owner, and an accessible suite. Near the main building were four duplex guest cabins that had double rooms on each side. The guides stayed in the sixth building, which everyone referred to as the “guide camp.” It contained private rooms for the guides, as well as a common kitchen and sitting room. The lodge usually operated between the third week of June and mid- to late-August (7 to 9 weeks each year). Several river rapids had to be crossed to access the lodge by boat. Most of the guests, probably 95% of them, arrived there by float plane. The lodge hosted wealthy fly-fishers and, at one time, it had prospered. In some years, the lodge achieved 70 or even 80 “rods” (one rod equals one guest-week) in the short salmon season. At times the lodge had as many as 20 guests in a week, which called for even more staff. During

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weeks with 20 guests, the lodge experience was almost unpleasant, because the guests were crowded, the staff was rushed, the service was not as good, and there were too many rods in the water. Dwight knew that the lodge’s bookings and revenues were down from what they had been years ago and that its infrastructure was starting to fail. He had heard stories of water shortages, power outages, and other issues that the lodge’s wealthy clientele regarded as serious inconveniences. THE PURCHASE A seasoned hotelier and life-long fisherman, Dwight immediately started making plans to buy the lodge. The renovations of the hotel had stretched him to the limit financially, so he brought in two financial partners from St. John’s, Newfoundland, and they formed a corporation called Pratt Falls Salmon Lodge (Ltd.). Dwight owned a majority of the shares. He assumed that the lodge would attract interest from other potential buyers, so he worked quickly to prepare and submit an offer, which was accepted. Dwight and his partners financed the purchase with assistance from the Business Development Bank of Canada (BDC). All three partners became guarantors for the mortgage that BDC provided. They closed the sale and took possession of the lodge in June 2009, three days before the season started. As soon as they purchased the lodge, the three partners obtained an operating line of credit from a credit union. The line of credit was also based on personal guarantees of the three partners. THE FIRST SEASON When Dwight and his partners took possession of the lodge, the infrastructure was in very poor condition. The showers would stop running unexpectedly at peak times when the demand exceeded the capacity of the well. The sewage lines, which ran above ground, occasionally broke apart at the joints and leaked sewage and waste water. Sometimes, the generator stopped working, causing blackouts in the lodge and cabins. Dwight decided that the maximum number of guests per week at the lodge should be 16 and that, even if there were 16 guests, only 12 rods should be permitted to fish in any given week. He and his partners expected approximately 60 rods or guest-weeks for the first season. When the season opened, however, they learned that only 16 rods had been booked to that point. During the first season, Dwight and his partners were “winging it” and operated the lodge “on a shoe string.” They used the line of credit for supplying the lodge with provisions and paying the salaries of the lodge’s employees. In the first season, Dwight and one of his partners worked as guides and took on other responsibilities at the lodge

Pratt Falls Salmon Lodge by Ken Medd 3

because, at that time, they could not afford to pay anyone to do anything that they could possibly do themselves. THE GROUP OF 10 Among the guests in 2009 were 10 sport fishers who had been coming to the lodge as a group for about 10 years. Some of them had been fishing at the lodge for more than 20 years. During their week at the lodge in July they mentioned several times that they wanted to talk to Dwight and the partner who was guiding there for the season. Dwight and his partner thought the group likely wanted to report service issues or offer suggestions about improving the operation of the lodge, so they arranged a meeting time near the end of the week. When the meeting began, the group’s leader opened his brief case, removed the lodge’s financial statements, and placed them on the table. Dwight and his partner were surprised to see those documents and even more surprised to learn that the group had intended to purchase the lodge when it was up for sale earlier in the year. The members of the group were working on an agreement among themselves when the previous owner accepted Dwight’s offer and sold the lodge. The leader explained that the group had been coming to the lodge for many years and that they wanted to own it. Dwight and his partner glanced at each other, but did not have to discuss the offer. They both shared the same view. Dwight answered quickly and directly that the shares were not for sale. The leader then explained that if it were not possible for the group to own the lodge exclusively, they would like to become part owners. Dwight clarified that he and his partners were not interested in selling any shares in the lodge. For his part, Dwight was trying to make a career as an owner of the Pratt Falls Salmon Lodge and wanted to turn his passion for fishing into his job. THE LINE OF CREDIT The season of 2009 ended in mid-August. In September, the credit union advised the partners that it considered the Pratt Falls Salmon Lodge to be a seasonal enterprise and, as a result, was calling for the line of credit to be repaid by the end of October. That was unexpected and harsh news for Dwight and his partners, and it did not reflect their understanding of the terms of the line of credit that they had arranged. Dwight and his partners did not have the capital to repay the line of credit by the deadline. The credit union advised them that, if the loan was not repaid by the end of October, they would be charged a higher rate of interest as if the outstanding amount were an overdraft.

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Dwight and his partners needed a solution. They knew that they would not be able to sustain payments at the overdraft rate through the winter and then operate the lodge the following season. Dwight recalled the offer that the group of 10 presented in July. He still did not want to take on more partners, because that effectively meant he would lose his majority share in the lodge. In fact, he could imagine the group eventually acquiring control of the lodge if they bought out one of his partners. He wondered if it would be possible to work out some other type of arrangement with the group, and began thinking of options he could propose to them. CONCLUSION Dwight Lethbridge and his two partners borrowed heavily to purchase a remote fishing lodge in Labrador and financed the lodge’s first season with a line of credit. Soon after the season ended, however, the credit union unexpectedly called the loan. In September 2009, Dwight needed a strategy to quickly address the situation.