The Award Phase You Decide Scenario Summary

The Award
Phase – You Decide

You are Chris and Pat Smith, entrepreneurs
with five years of experience investing in small businesses. Eighteen
months ago you decided to invest in a catering venture with two chefs, J. P.
Martin and L. L. Miller, who have culinary science degrees and five years
of work experience, which includes winning a prestigious prize in a gourmet
food competition. Following some extended discussions, the four of you decided
to set up a business catering to parties and weddings under the name of At
Your Service.

The arrangement between you was quite informal. Essentially you
put up $25,000 and the chefs put up $10,000 in capital to get the operation
started. You were to manage the advertising, and the bookkeeping. The chefs’
contribution was to set up the kitchen and menus, cook, hire staff, and be on
site to supervise all catering jobs. The agreement between you was that the
profits would be split 50-50 after clearing fixed expenses.

Although the first few months were difficult and At Your
Service had to use some of the investment reserves to cover monthly expenses,
a good newspaper review produced a spurt of business in the third month when
the company not only covered fixed costs, but distributed a profit of $250 to
each owner. Throughout the first year, you continued to make a little
money, or lose a little every month, but the company has been steadily losing
money in the second year and has had to use reserves in order to keep in
business.

You think the problem is that the chefs do not know how to manage
a business. As soon as the business seemed to be breaking even last year, you
noticed that they changed menus, offering more elaborate dishes with more
expensive ingredients without increasing prices. These dishes cost too much and
take too much time to prepare, limiting their availability to take on more jobs.

The lack of profits forced you to take a more active role in the
management of the company. Although you told the chefs to raise prices, they
approved the new seasonal menus with the same elaborate dishes and the same low
prices. You found out before the menus were printed and raised the prices by
10%. You have also put them on a strict ingredients budget.

Of course, all of this has not pleased them, but the $35,000
investment is rapidly disappearing. You are down to $15,000 in working capital,
and you and your partner have no more money to put into the business. You are
quite sure that Martin and Miller have no more money either.

Last week, you all briefly discussed dissolving the business. You
are very interested in doing so; you find it hard to believe you had such bad
business judgment to form a partnership with two chefs. It is possible that
with higher prices and more discipline on their part profitability will
improve, although you doubt that your relationship will. Alternatively,
profitability may not improve and you will have to use the last of the reserves
to terminate the leases on the space, the van, and the kitchen equipment.

The issues that have to be resolved are as follows:

• How you will split the $15,000 left in the investment?
• How to handle the lease on the kitchen space, which has
  18 months more to run?
• How to handle the lease on the van, which has 18 months
  more to run?
• How to handle the lease on the kitchen equipment, which
  as six months more to run?
• What have you learned this week that would ensure that
  ech of the above outcomes would be a win/win situation?

There are a variety of options for distributing the remaining
capital. You take the remaining capital giving the chefs nothing; you take
$12,000 leaving $3,000 for the chefs; you take $10,000 and they take $5,000;
you split the capital evenly; you take $5,000 and they take $10,000, you take
$3,000 and they take $12,000; you leave all the remaining capital for them. You
need to recoup as much as your investment possible to open an alternative
venture. You recently began to look at the possibility of opening a flower
shop, although you have not yet done extensive planning for it. To do so you
need capital. You also do not think that the chefs deserve the capital because
they caused the business to fail.

You also need to rent space for this new venture, and you were
thinking that you might take over the lease on the store front space that you
rented for the catering business. The only problem is the kitchen, which you
really do not need and don’t want to have to pay a premium price for. Your
options are to promise the chefs that you will make the storefront lease
payments; to have the lease amended to be in your names only (which would cost
about $500); terminate the lease and pay the $1,000 penalty; have the lease
amended to remove your names (same $500 cost); accept the chefs’ promise to pay
the lease. All in all, you think it is better to leave the lease alone and just
promise the chefs that you pay it rather than pay the fee for changing the
names on the lease, terminating it, or paying the fee to assign it to them. You
are concerned that if they took over the lease and then later could not make
payments, you would still be responsible.

You could certainly use the van leased for the catering service
for flower deliveries. Your options for the van are similar to those for the
storefront space. You could promise the chefs that you will make the van
payments, have the van lease amended to be in your names only (which would cost
about $500); terminate the lease and pay the $1,000 penalty, have the lease
amended to remove your names (same $500 cost); accept the chefs’ promise to pay
the van lease. You are concerned that if the chefs took over the lease and then
later could not make the payments you would be liable. Your first preference is
to promise the chefs that you will make the payments. If necessary, you are
willing to make the $500 payment to take their names off the lease. You have
the same concern about the van lease as you do with the storefront lease, if
you turn it over to the chefs before the end of the term of the lease, you will
still be responsible for payments they do not make. Your preference is to take
the van’s lease over yourselves.

You have no use for the high quality cooking equipment that was
leased for the catering business. You have a similar set of options for the
kitchen equipment as you have for the storefront and van. You assume the chefs
will continue in the cooking business and can use the equipment. It would be
all right with you if they took over the lease. You understand there is no
charge to remove your names from the lease agreement. However, you think the
best all around solution is to terminate the lease for the kitchen equipment.

You are to meet with the chefs to try to dissolve the partnership.
Review the comments of the Key Players,consult the Grading Rubric in Doc
Sharing, and then answer the following questions:

1. How you will split the $15,000 left in the investment?
2. How to handle the lease on the kitchen space, which has
   18 months more to run?
3. How to handle the lease on the van, which has 18 months
   more to run?
4. How to handle the lease on the kitchen equipment, which
   as six months more to run?
5. What have you learned this week that would ensure that
   ech of the above outcomes would be a win/win situation?