Case Summary
We are Chris and Pat Smith, entrepreneurs with five years of experience investing in small businesses. Eighteen months ago we 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 us decided to set up a business catering to parties and weddings under the name of At Your Service. Unfortunately the business did not generate the expected profits therefore we are in the process of dissolving the business.
How will we split the $15,000 left in the investment?
It is unfortunate that we did not make a formal agreement that outlines an exit strategy. There is always risk in business and the best way to handle the unexpected is to plan for it ahead of time. If we think about the capital distribution at the beginning of the partnership, we put $25000 and the chefs put $10,000 plus $10,000 adding up to $45,000 for 100% of the shares. Each share is worth $450 , therefore we own 55.5% of the company while chefs own $45.5%.
Now we have $15,000 left to be split. If we split this capital according to the ownership percentage, we should receive $8,325 and the chefs should receive $6,675. But we do not think the chefs deserve this as they caused the business to fail. Also we will need capital for our new venture, therefore we should only give them $3,000 and keep the $12,000. In order to get them agree on this distribution, we should use the kitchen equipment as a negotiation factor. We can not utilize the kitchen equipment in our flower shop, but it is essential for the chefs.

How to handle the lease on the kitchen space, which has 18 months more to run?
We will need to rent space for our flower shop, and the store front of the catering shop may work for our business. But there is a kitchen attached to the shop that we will not be able to utilize. That kitchen is essential for the chefs’ business. Also there is an established business and custmers know where the location is which is a huge advantage for the chefs. They would want to keep the space. Therefore we should offer them to amend the lease in their name only and they should pay the $500 cost for this amendment. This woud be the best solution as we can not trust the chefs to pay their share of the lease if we keep the lease and let them operate in the kitchen. Their business is failing already and we should not take another risk here.
How to handle the lease on the van, which has 18 months more to run?
We can use the van leased for our flower deliveries. Therefore we should keep the van. Again, promise does not work in business as concequences may fail you to keep your promises. We should remove the chefs names from the lease fo the van and offer them that we will pay the $500 for the amendment cost.
How to handle the lease on the kitchen equipment, which as six months more to run?
We can not use the kitchen equiment in our new business, so this makes a good negotiation point for us. Since the chefs will continue in the cooking business and can use the equipment, it has more value to them. There is no charge to remove our name from the lease, so we should offer them to keep the lease in return of getting more capital for our new business. They can keep the kitchen equipment lease in their name if they agree to be paid $3,000 from the capital.
Conclusion
Capital $12,000 the entrepreneurs $ 3,000 the chefs 75 points
Store The chefs take over lease and pay $500 20 points
Van The entrepreneurs take over lease and pay $500 65 points
Equipment The chefs take over lease 15 points
Total 175 points