Background: The Largo Group (TLG)
After graduating with a B.S. in Management, you have been working for TLG for three years as an assistant consultant for Winnie James and Ralph Anders, senior consultants who serve clients in a variety of industries. Your work involves interviewing and meeting with clients, conducting research, writing office memorandums, making recommendations for clients, meeting with Winnie and Ralph with attorney-consultants, and coordinating and/or leading discussions for TLG’s in-house professional development seminars for its consultants.
Connor, Ali, Madison and Sam are all successful business owners who are friends or professional acquaintances in the business community. Connor has been the project manager for ten years for a construction company owned by a general contractor. Ali has been the Director of Marketing for a Mid-Atlantic-based carpet cleaning company with franchises on the East Coast. Madison owns a mid-sized, successful residential remodeling business. Sam owns a residential cleaning service business.
The four recently attended a Chamber of Commerce presentation about “green” businesses. This spurred their interest and they went to dinner following the Chamber event to discuss possible business opportunities. After several meetings, they decided to start a business together. The group decided that a commercial cleaning business would be a good fit for their professional experiences, skills, and interests. They agreed to pursue the possibility of launching a Maryland-based “green” commercial cleaning service business that they would like to name Clean-N-Shine (“Clean”). They are committed to operating the new business as an environmentally responsible company using only chemical-free cleaning products in the new business.
The four met several times with a business consultant to complete an analysis of market trends and demands in the cleaning industry and confirm whether Clean would likely be a viable business. The market analysis showed an increased demand and need for environmentally responsible cleaning businesses in the region. Consequently, the group decided to move forward with their idea to establish and market Clean as a green business.
The group plans to purchase cleaning supplies from Environmental Pro, Inc. (EPI), a mid-sized manufacturer incorporated in a nearby state, that produces chemical-free environmentally-friendly cleaning products. The four are familiar with the corporation as each has purchased EPI products for their respective current businesses. The four friends intend to resell certain EPI products directly to Clean clients. The Clean group plans to market and advertise their services and re-sell EPI products through print, television, radio media, and via internet sales.
Clean will be headquartered in a local shopping center. Clean headquarters will include private business management offices, a reception area, and conference meeting and planning space to which potential and existing customers will be invited to discuss proposals for cleaning jobs, cleaning products, and to complete contracts for sales and services. The business space also will be open to the public to collect information and inquire about Clean services, examine cleaning supply displays, and view photos and exhibits from ongoing and past commercial jobs.
The potential Cleaner owners recently attended a start up business seminar sponsored by the local chapter of the Small Business Administration. Following the seminar, the owners began to define the nature and scope of the work necessary to prepare a plan for the start-up business. They realize this process requires time, thoughtful analysis, and clear guidelines.
They also recognize the need for professional business consultants, such as TLG, to guide their start-up for Clean. Consequently, the four have hired TLG to advise and guide them through the start-up process for Clean.
Clean Owner Profiles:
He wants an initial 30%-40% interest in Clean but wants to limit his future capital commitment until he is certain the business is operating smoothly and profitably. He does, however, want the option to acquire others’ interests if they die or leave the business for any reason. He also wants to take out money from the business, in the form of salary, benefits, expenses, and/ dividends, as appropriate, as soon as Clean has a healthy net profit margin.
Connor is most concerned about liability, and although he trusts the other owners as “straight shooters” and successful business persons, he is uneasy about working with a group of investors with whom he has no previous business connections. He wants to limit his liability in the business to no more than his capital contribution, and prefers complete protection. If possible, he wants Key Man Insurance for the owners so all will have protection if one owner can no longer contribute to business for any reason.
Connor wants a managerial position so he can make decisions for day-to-day operations. He believes he is the best person to run the business as he currently owns a maid service and understands how to run a successful cleaning service business.
Ali wants a 25% interest and prefers to minimize additional investments to protect her cash assets needed for her other businesses. Her main goal is to realize a return on her investment as quickly as possible.
Ali wants to minimize her personal liability and protect her interests in the event of bankruptcy or death of any of the other owners.
Ail wants to participate in long-term business decisions, and in major decisions about spending and organizational commitments, but she does not want to be involved in day-to-day business activities. She favors hiring a general manager to run the business, preferably one with commercial cleaning experience.
Madison initially wants to invest up to 40% and is willing to invest another 5% because she knows start-up businesses often need more capital. She favors a larger, rather than a smaller, stake in the business. She wants to take out as much money as possible from the business, as soon as financially possible.
Madison wants to minimize personal liability, as well as liability for the business. She realizes the future of the business is uncertain and she wants maximum protection again all pitfalls.
Madison is willing to be involved in day-to-day business operations and has the time to do so because her other business is running smoothly with competent managers. She wants to play a key role, along with the other owners, in establishing the structure, business environment, and culture for Clean. However, she believes that a skilled general manager with commercial cleaning experience would be optimal for the business.
Sam is willing to commit to an investment of 51% interest in Clean, but is agreeable to a lesser interest.
Sam wants to minimize his personal liability and prefers to limit it to his capital investment but is willing to negotiate.
With a maximum interest of 51%, Sam wants complete control over business operations; even with a lesser interest, he wants a strong managerial position. Sam wants all owners with a minority interest to be silent in day-to-day management of Clean.
Background/Facts: During a monthly Lunch and Learn Seminar at TLG offices, all TLG business consultants are discussing various client cases. During the Discussion of Clean’s new business, the group discusses the following question:
(1) Analyze and explain the implied warranty of merchantability.
(2) Analyze and explain specifically how and why Clean could be sued for breach of implied warranty of merchantability for using EPI cleaning products to clean Clean’s clients’ commercial property. `