a) Levi Strauss, founder of the world’s most famous denim jeans company, made hi
ID: 399477 • Letter: A
Question
a) Levi Strauss, founder of the world’s most famous denim jeans company, made his fortune in the California Gold Rush as the maker of sturdy pants. Levi Strauss & Co. is privately held by the descendants of the family of Levi Strauss and shares of company stock are not publicly traded. What are the advantages and disadvantages of keeping Levi Strauss and Co. under family control rather than selling stock to the public?
b) Your friend is in a quandary, and she needs your help. She cannot decide whether to start an independent business from scratch or purchase a franchise. What are the advantages and disadvantages of each? Which route will you recommend for your friend
Explanation / Answer
a) The advantages of keeping Levi Strauss and Co. under family control are that there is no external interference in any decision making process of the company, assets and profit margins remains under total control of the owners and the management is under no obligation to make public its source of financing, income, recruitment or future expansion plans. The company can also close down its operations for its own reasons by following the due process of law.
On the other hand the major disadvantage of keeping the company under family control is limited source of financing besides limited liability. The company can either increase its funding by way of bank loans or invest its own resources since general public cannot trade in its shares. Secondly, even though the liabilities of owners is limited in a private limited company, i.e. limited to their personal share holdings, the share holders are committed to clear the debts of the company by selling off their shares in totality if need arises.
b) Starting an independent business is always a risky proposition. There is no assurance whether the business will succeed or not as it is dependent on a variety of factors. Since everything will be new in the market, i.e. brand name and services, it may take considerable time for the venture to be established and succeed. The finances invested thus will always be at risk till a break even point is reached.
On the other purchasing a franchise has much less risk for failure. A franchise would most likely be an established brand name in the market and its acceptability will be instantaneous. The disadvantage of a franchise enterprise is that a major portion of sales revenue or profit margin will be paid to the franchisor as loyalty amount. Besides, the franchisee has little control over the product offerings and service modules as it is bound by the agreement to follow all diktats of the franchisor.
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