You Decide
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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.
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