Reference no: EM132178163

Background: Painted Images (PI)

Jo, Maddy, and Taylor are friends, business acquaintances, and residents of Maryland. Jo has been the project manager for twelve years for a construction company owned by a general contractor and developer. Maddy and Taylor have owned and operated a small, successful home rehab and “flipping” business for ten years.

After considering several business ventures, the group decided that a residential painting business would be a good fit for their professional experiences, skills and interests and agreed to pursue the possibility of launching a Maryland-based painting business named Painted Images.

The three hired a market analyst to research market trends and demands for the painting services industry and confirm whether Painted Images would likely be a viable business in their community. The market analysis showed there is an increased demand for homes services businesses in the region.   Consequently, the group decided to move forward with their idea to establish PI.

The group is committed to operating and marketing PI as a green business. Most paint contains high VOC (volatile organic compounds) that pollute the air, particularly indoor air. According to the Environmental Protection Agency, VOCs are considered one of the top five hazards to human health, arising primarily from interior paints and finishes. New environmental regulations and manufacturing techniques have led to the development of low-VOC and zero-VOC paints that are durable, cost-effective and less harmful to human and environmental health.

Jo, Maddy, and Taylor plan to purchase all paint and other supplies from Naturals, Inc. (Naturals), a mid-sized manufacturer of zero-VOC paint and chemical free paint supplies. The potential owners of PI are familiar with Naturals as each has purchased from Nautrals for their respective current businesses.  PI plans to resell certain Naturals products to PI clients directly for painting jobs, and via internet sales.

PI will be headquartered in a business space in a local shopping center. The PI headquarters will include private business offices, a reception area, and conference meeting and planning space to which potential and existing customers will be invited to discuss proposals for painting jobs, paint products, and to complete contracts for painting jobs. The business space will be open to the public to collect information and inquire about PI services, examine paint displays, and view photos and exhibits from ongoing and past painting jobs.

The potential PI owners recently attended a start up business seminar sponsored by the local chapter of the Small Business Administration. Following the seminar, the owners held several meetings to define the nature and scope of the work to be done to prepare a clear plan for the start-up business. They realized this process requires time, thoughtful analysis, and clear guidelines as the owners have somewhat different priorities, interests and expectations.

They also recognized that they need for professional business consultants, such as BCA, to guide their start-up for PI. Consequently, the three have hired BCA to advise and guide them through the start-up process for PI.

Painted Images Owners

Jo:  Jo wants an initial 30%-40% interest in PI, but wants to limit future capital commitment until the business is operating profitably. Jo wants the option to acquire others’ interests if they die or leave the business for any reason.   Also, Jo wants to take out money from the business, in the form of salary, benefits, expenses, or dividends, as appropriate, as soon as PI has a healthy net profit margin.

Jo is most concerned about liability and knows the other owners are trustworthy and ethical, but wants to limit personal liability in the business to no more than capital contribution. If possible, Jo wants Key Man Insurance for the owners so all will have protection if one owner can no longer contribute to business for any reason.

Jo prefers a strong managerial position to make decisions for day-to-day operations. Jo is willing to be involved in day-to-day business operations and wants to play a key role, along with the other owners, in establishing the structure, and the business environment and culture for PI.  

Maddy:  Maddy wants at least a 25% interest, and prefers to minimize additional investments to protect personal cash assets needed for other business investments. Maddy’s main goal is to realize a return on investment as quickly as possible.

Maddy wants to minimize personal liability, especially in the event of bankruptcy or death of any of the other owners.

Maddy wants to participate in long-term business decisions, but does not want to be involved in day-to-day business activities. Maddy prefers to hire a general manager to run the business, although is willing to consider having others manage the business.   

Taylor:  Taylor is enthusiastic about the new business plans and trusts the others and respects their business expertise.  

Taylor is willing to commit to an investment of 51% interest in PI, but is agreeable to a lesser interest. With a maximum interest of 51%, Taylor would want complete control over business operations. Even with a lesser investment, Taylor wants a strong managerial position and prefers owners with a minority interest to be silent in day-to-day management of PI.  

Taylor wants to minimize personal liability.

Background: The PI owners are aware of the importance of contracts used in business to both buy and sell goods and services. They are reviewing the Uniform Commercial Code (UCC), Article 2, that covers contracts for sales of goods.  

In sales contracts, it is important to consider allocation of risk between a buyer and a seller to define value, and typically each party will want to shift as much risk as possible to the other party.

The PI owners understand that they would want different terms in their purchase contracts and sales contracts. First, they want to focus on their sales contracts for selling paint and other supplies, and have asked BCA to prepare a memorandum that recommends desired contract positions on a variety of terms for PI’s contracts for sale of goods.

Instructions:  You are tasked with preparing a memorandum to Pat, Gale and the PI owners to make recommendations for sales contracts.

The terms below are just a few of the terms that you, Pat and Gale determined should be included in a sale of goods contract for PI.

For each of these terms, recommend and explain details and policies for each of these terms in a contract for a PI sale of goods to a buyer.

For each of these terms, also include the UCC, Article 2, section that applies to the term.

Transfer of title and risk of loss or damage to goods PI is delivering to buyers