ASN-84-E
November 2020
Herrenberg Tennis School and Club
Thomas Klueter
Luis Palencia
Juan Carlos Vázquez-Dodero
“I’ve had enough, Michael. I can’t go on like this.”
“Don’t worry about it, Anne.”
“What do you mean, don’t worry? If we carry on like this, we’ll be left with only the clothes
on our backs. We might even end up in jail!”
“Just stop worrying, Anne, will you?”
“On the other hand, if we give up now, we’ll lose the €50,000 we’ve invested. And it would
be a pity, because the business makes sense and I think it could work. I don’t understand how
we got ourselves into this mess. You’ve been less than honest with me, Michael, and I’m
starting to get fed up.”
“Don’t worry, Anne. Everything’s going to be OK. We just need to tough it out, that’s all.”
It was the last week in November and Anne Maier was talking to Michael Schramm, her partner
in Tennis Herrenberg, a tennis school and club on the outskirts of Stuttgart. They had until
December 9 to decide what to do about the business. Anne remembered how, two years earlier,
she had made up her mind to take the plunge and had invited Michael to join her in starting a
sports school.
Since that time, Anne had worked nonstop and was annoyed that Michael showed less
commitment and took what Anne felt were liberties with the cash from the bar. Admittedly, she
herself had also “dipped” into petty cash on occasion, but Michael had done it to an extent that
was unacceptable.
This case was prepared by Professors Thomas Klueter, Luis Palencia and Juan Carlos Vázquez-Dodero. November 2020.
IESE cases are designed to promote class discussion rather than to illustrate effective or ineffective management of a given
situation.
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Last edited: 28/6/22
ASN-84-E
Herrenberg Tennis School and Club
Anne was 24 when she decided to set up her own business. Being an excellent tennis player and
coming from a humble background, she had the right qualities to work with youngsters, and so
had decided to start a professional tennis school for up-and-coming talent. Her friend Michael,
also an excellent player, was delighted to join the venture, as he “had to do something.”
Having grown up in the “pro” tennis environment of the “Baden-Wuertemberg school,” (the
region in which both Steffi Graf and Boris Becker had started their training and careers), they
both had good contacts and experienced no difficulty finding their first eight customers, all of
them young people aged 14 to 18. Anne had discovered a semi-abandoned tennis club, called
Tennis Herrenberg, close to a freeway only 25 km. from Stuttgart, with other similar clubs and a
large business park nearby. For a very reasonable price, they could rent the four courts they
needed (one for every two students) to start their classes there. They took out a bank loan to
finance the purchase of a van and the school was ready to go. Monday through Friday, they
would pick up their pupils in Stuttgart and the nearby vicinity, drive them to the courts, practice
for three hours, and then drive them back to Stuttgart, where the pupils received targeted
physical training in a gym. They carried on like this for a year and a half and everything went
well. They were able to repay the loan for the van and even generated a small net income.
Both Anne and Michael turned out to be excellent coaches. They knew how to relate to their
young students and soon made a name for themselves in the Stuttgart area; within months,
their students had started to get themselves noticed locally.
Anne had always had an entrepreneurial bend and wanted to be her own boss, so Michael was
not surprised when she suggested they buy Tennis Herrenberg and turn it into a sports club.
The owner of the club, Josef Kaiser, promptly poured cold water on their enthusiasm by asking
€900,000 for the land and the facilities.
Tennis Herrenberg
Tennis Herrenberg occupied a plot of around 6,00 m2, with 12 tennis courts in a deplorable state
and two semi-derelict buildings, each with a floor area of 120m2. One of the buildings had
previously been utilized for changing rooms, while the other was used as a bar and had a small
office. 8 of the courts we covered by a wooden/metal structure that could be opened or closed
to allow continuous usage even under harsh weather conditions (“halboffen” in German). There
were at least three tennis clubs within an area of around 3km2. Only one of them operated
exclusively on a membership basis; the rest also rented their courts by the hour. Most seemed
to be doing fairly well but none of them had covers. Some of the companies located nearby
organized championships for their employees and on weekends from Friday afternoon to
Sunday lunchtime, the courts filled up with players from Stuttgart, Tübingen and the surrounding
area. Anne and Michael thought they could make a success of it if they improved the club’s
facilities. The fact that they were both good players would be an advantage, they thought. They
wondered why the club had not been successful before, considering it was in such an exceptional
location. They assumed that, as the owner had interests in various other businesses, he had
never really exploited the club’s potential.
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Herrenberg Tennis School and Club
ASN-84-E
The Contract
At the price Josef was asking, buying the business was out of the question, so they negotiated
an eight-year lease. A businessman in his mid-50s who ran several parking facilities in the city,
Josef drove a tough deal. The contract that Anne and Michael signed made them responsible for
the existing full-time employees, Luise and Manuel, who had been working at the club for over
20 years. 1 One clause stated that if they pulled out of the business before the end of the first
year of operation (i.e., before December 9), they would have to pay the employees
compensation equal to 50 days’ salary for that year, with the remaining severance pay covered
by the owner (Josef Kaiser). If they closed after December 9, however, they would have to pay
the full amount of the severance due to both employees. In the former case, the amount payable
was estimated to be around €4,000, whereas, in the latter, it would be roughly €55,000.
The contract also established that, during the first year, they would make substantial
improvements to the club’s facilities. Furthermore, the owner was free to sell the club whenever
he liked, provided he paid Anne and Michael an amount based on the demonstrable cost of the
improvements they had made (100% if he sold it in the first year, 75% in the second, 50% in the
third, and 25% in any of the following years).
For 11 months after signing the contract, Anne and Michael carried on as before with their “pro”
lessons. As it proved very difficult to persuade people to pay a monthly membership fee, they
decided to rent the courts by the hour.
The Last Week in November
During the last week in November, Anne and Michael tried to get a clear idea of how the business
was doing and what their financial position was. They had no formal bookkeeping system, but
Anne had the impression that the “pro” school was making a profit, whereas the club itself was
losing money. As a result, they were barely covering expenses and were struggling to stay
current with their payments. Over the past year, neither had drawn a regular salary, with both
of them withdrawing small amounts of cash from the club on an “as needed” basis, especially
Michael, who brushed off any talk about accounts or receipts.
Anne and Michael were both kept busy by their pupils, but accounts and financial control of the
business were somewhat neglected. In an attempt to clarify their situation, Anne gathered
together all the paperwork she could find that documented the club’s expenses and revenue, as
well as its debts and assets.
To start the business, they had invested all they could afford (€10,000 each) and had taken out
a bank loan of €30,000. The monthly payments on this loan (principal plus interest) amounted
to €750, which would take them five years to pay off. They had invested €38,000 in refurbishing
the club’s facilities; the remaining €12,000 were being kept by Josef Kaiser as a deposit until the
end of the contract.
1 Luise and Manuel were part of a 20 personnel service agency owned by Josef Kaiser, which was responsible for servicing
the tennis facilities and the parking centers. As such, the Kündigungsschutzgesetz (KSchG – Protection from Layoffs) for
companies of 10 or more employees would be applicable.
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ASN-84-E
Herrenberg Tennis School and Club
If Anne and Michael had to wind down the business, the only assets they could sell would be the
van, a ball machine and some bar equipment. Anne thought that, if it came to the crunch, they
would be lucky to get €5,000 for the lot. Nor was she sure how to account for all the
improvements they had made to the facilities. One year earlier, the club had been semiabandoned; now, it had 12 lighted courts in perfect condition, a bar and changing rooms.
On the other hand, besides the bank loan already mentioned, they had the following debts:
Two bills of exchange, maturing on December 4 and January 4, in the amount of €1,000,
in the name of a construction worker.
They owed Luise, one of the bar employees, €1,500 in back wages.
They owed €500 to the worker who had fixed the door blinds and €3,000 to the
electrician. Knowing the difficulties the partners were facing, both workers had agreed
that the partners would pay them whenever they could.
They owed Josef €6,000 in unpaid rent. This debt had to be paid by December at the
latest.
The Business
Anne and Michael managed the club on the basis of renting the courts. From Friday at noon to
Sunday, people showed up to play, but the rest of the week, the courts were practically empty.
Anne and Michael were talking to various companies in the area about the possibility of
organizing championships for their employees on weekday evenings, the way other clubs with
less attractive facilities did. If they could get one of these championships, between court rental
and bar income, it would represent revenue of around €2,000 in total over a period of three
months. The club could hold two such championships without interfering with the “pro” classes.
Anne had been promoting the club through flyers distributed in the local business park and some
parts of Stuttgart and Tübingen, as well as through direct mail to the companies in the business park.
In an average month, they would gross €7,500 from court rentals (€15/hour on weekends,
€12.50/hour on weekdays). The bar took in around €1,500 per month. The revenue from the
“pro” classes was approximately €5,000 for the 20 students they had. Recently, they had started
offering lessons for children on weekends, which contributed another €1,000 of revenue.
On the expense side, they had three semiprofessional coaches who were paid by the hour; each
cost €700 per month. The physical trainer cost €800 per month. Luise, who ran the bar, earned
€1,200 gross, the same as Manuel, who was responsible for repairs and who looked after the
courts. A local couple helped Manuel and took care of the cleaning, earning €1,500 between
them. The rent the partners paid to Josef was €6,000 per month. Electricity, water, telephone
and gas accounted for another €700 a month. Supplies for the bar amounted to around €1,000
per month; Social Security, €800; and diesel for the van, around €600. Repairs were around
€600, although the amount varied from month to month.
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Herrenberg Tennis School and Club
ASN-84-E
Alternatives
As her personal relationship with Michael had been steadily deteriorating in recent months,
Anne felt she had to decide about the future of the club. She did not know whether they should
carry on – accepting the risk of failure and having to pay compensation – or try to get out while
they could. Anne felt that she carried the responsibility for the business on her own. Although,
in theory, it was a partnership, she knew that she could only depend on Michael “up to a point”
if things went very wrong. Michael had grown up in a comfortable environment and was
disorganized and unreliable. “All this is too much for me,” Anne thought to herself. That was why
she was worried, in contrast to Michael, who seemed unconcerned.
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