Ben & jerry's financial statements

Equity Project

SOURCE: Courtesy BEN & JERRY’S HOMEMADE, INC. www.benjerry.com

CHAPTER

A n O v e r v i e w o f F i na nc i a l Ma na ge me n t1

make money. For example, in a recent article in Fortune

magazine, Alex Taylor III commented that, “Operating a

business is tough enough. Once you add social goals to

the demands of serving customers, making a profit, and

returning value to shareholders, you tie yourself up in

knots.”

Ben & Jerry’s financial performance has had its ups

and downs. While the company’s stock grew by leaps

and bounds through the early 1990s, problems began to

arise in 1993. These problems included increased

competition in the premium ice cream market, along

with a leveling off of sales in that market, plus their

own inefficiencies and sloppy, haphazard product

development strategy.

The company lost money for the first time in 1994,

and as a result, Ben Cohen stepped down as CEO. Bob

Holland, a former consultant for McKinsey & Co. with a

reputation as a turnaround specialist, was tapped as

Cohen’s replacement. The company’s stock price

rebounded in 1995, as the market responded positively

to the steps made by Holland to right the company. The

stock price, however, floundered toward the end of

1996, following Holland’s resignation.

Over the last few years, Ben & Jerry’s has had a new

resurgence. Holland’s replacement, Perry Odak, has done

a number of things to improve the company’s financial

performance, and its reputation among Wall Street’s

or many companies, the decision would have been

an easy “yes.” However, Ben & Jerry’s Homemade

Inc. has always taken pride in doing things

differently. Its profits had been declining, but in 1995

the company was offered an opportunity to sell its

premium ice cream in the lucrative Japanese market.

However, Ben & Jerry’s turned down the business

because the Japanese firm that would have distributed

their product had failed to develop a reputation for

promoting social causes! Robert Holland Jr., Ben &

Jerry’s CEO at the time, commented that, “The only

reason to take the opportunity was to make money.”

Clearly, Holland, who resigned from the company in late

1996, thought there was more to running a business

than just making money.

The company’s cofounders, Ben Cohen and Jerry

Greenfield, opened the first Ben & Jerry’s ice cream shop

in 1978 in a vacant Vermont gas station with just

$12,000 of capital plus a commitment to run the business

in a manner consistent with their underlying values. Even

though it is more expensive, the company only buys milk

and cream from small local farms in Vermont. In addition,

7.5 percent of the company’s before-tax income is

donated to charity, and each of the company’s 750

employees receives three free pints of ice cream each day.

Many argue that Ben & Jerry’s philosophy and

commitment to social causes compromises its ability to

S T R I K I N G T H E R IG H T BA L A N C E

BEN & JERRY'S

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C H A P T E R 1 � A N O V E R V I E W O F F I N A N C I A L M A N AG E M E N T4

The purpose of this chapter is to give you an idea of what financial management

is all about. After you finish the chapter, you should have a reasonably good idea

of what finance majors might do after graduation. You should also have a better

understanding of (1) some of the forces that will affect financial management in

the future; (2) the place of finance in a firm’s organization; (3) the relationships

between financial managers and their counterparts in the accounting, marketing,

production, and personnel departments; (4) the goals of a firm; and (5) the way

financial managers can contribute to the attainment of these goals. �

C A R E E R O P P O R T U N I T I E S I N F I N A N C E

Finance consists of three interrelated areas: (1) money and capital markets, which deals with securities markets and financial institutions; (2) investments, which fo- cuses on the decisions made by both individual and institutional investors as

See http:// www.benjerry.com/ mission.html for Ben & Jerry’s interesting mission statement. It might be a

good idea to print it out and take it to class for discussion.

Information on finance careers, additional chapter links, and practice quizzes are available on the web site to accompany this

text: http://www.harcourtcollege. com/finance/concise3e.

analysts and institutional investors has benefited. Odak

quickly brought in a new management team to rework

the company’s production and sales operations, and he

aggressively opened new stores and franchises both in

the United States and abroad.

In April 2000, Ben & Jerry’s took a more dramatic

step to benefit its shareholders. It agreed to be acquired

by Unilever, a large Anglo-Dutch conglomerate that

owns a host of major brands including Dove Soap,

Lipton Tea, and Breyers Ice Cream. Unilever agreed to

pay $43.60 for each share of Ben & Jerry’s stock—a 66

percent increase over the price the stock traded at just

before takeover rumors first surfaced in December 1999.

The total price tag for Ben & Jerry’s was $326 million.

While the deal clearly benefited Ben & Jerry’s

shareholders, some observers believe that the company

“sold out” and abandoned its original mission. In

response to these concerns, Ben & Jerry’s will retain its

Vermont headquarters and its separate board, and its

social missions will remain intact. Others have

suggested that Ben & Jerry’s philosophy may even

induce Unilever to increase its own corporate

philanthropy. Despite these assurances, it still remains

to be seen whether Ben & Jerry’s vision can be

maintained within the confines of a large conglomerate.

As you will see throughout the book, many of today’s

companies face challenges similar to those of Ben &

Jerry’s. Every day, corporations struggle with decisions

such as these: Is it fair to our labor force to shift

production overseas? What is the appropriate level of

compensation for senior management? Should we

increase, or decrease, our charitable contributions? In

general, how do we balance social concerns against the

need to create shareholder value? �

5

they choose securities for their investment portfolios; and (3) financial manage- ment, or “business finance,” which involves decisions within firms. The career opportunities within each field are many and varied, but financial managers must have a knowledge of all three areas if they are to do their jobs well.

MONEY AND CAPITAL MARKETS

Many finance majors go to work for financial institutions, including banks, in- surance companies, mutual funds, and investment banking firms. For success here, one needs a knowledge of valuation techniques, the factors that cause in- terest rates to rise and fall, the regulations to which financial institutions are subject, and the various types of financial instruments (mortgages, auto loans, certificates of deposit, and so on). One also needs a general knowledge of all as- pects of business administration, because the management of a financial insti- tution involves accounting, marketing, personnel, and computer systems, as well as financial management. An ability to communicate, both orally and in writing, is important, and “people skills,” or the ability to get others to do their jobs well, are critical.

INVESTMENTS

Finance graduates who go into investments often work for a brokerage house such as Merrill Lynch, either in sales or as a security analyst. Others work for banks, mutual funds, or insurance companies in the management of their in- vestment portfolios; for financial consulting firms advising individual investors or pension funds on how to invest their capital; for investment banks whose pri- mary function is to help businesses raise new capital; or as financial planners whose job is to help individuals develop long-term financial goals and portfolios. The three main functions in the investments area are sales, analyzing individual securities, and determining the optimal mix of securities for a given investor.

FINANCIAL MANAGEMENT

Financial management is the broadest of the three areas, and the one with the most job opportunities. Financial management is important in all types of busi- nesses, including banks and other financial institutions, as well as industrial and retail firms. Financial management is also important in governmental opera- tions, from schools to hospitals to highway departments. The job opportunities in financial management range from making decisions regarding plant expan- sions to choosing what types of securities to issue when financing expansion. Financial managers also have the responsibility for deciding the credit terms under which customers may buy, how much inventory the firm should carry, how much cash to keep on hand, whether to acquire other firms (merger analy- sis), and how much of the firm’s earnings to plow back into the business versus pay out as dividends.

Regardless of which area a finance major enters, he or she will need a knowl- edge of all three areas. For example, a bank lending officer cannot do his or her

C A R E E R O P P O R T U N I T I E S I N F I N A N C E

Consult http:// www.careers-in- business.com for an excellent site containing information on a variety of

business career areas, listings of current jobs, and a variety of other reference materials.

C H A P T E R 1 � A N O V E R V I E W O F F I N A N C I A L M A N AG E M E N T6

SELF-TEST QUESTIONS

What are the three main areas of finance?

If you have definite plans to go into one area, why is it necessary that you know something about the other areas?

Why is it necessary for business students who do not plan to major in fi- nance to understand the basics of finance?

job well without a good understanding of financial management, because he or she must be able to judge how well a business is being operated. The same thing holds true for Merrill Lynch’s security analysts and stockbrokers, who must have an understanding of general financial principles if they are to give their cus- tomers intelligent advice. Similarly, corporate financial managers need to know what their bankers are thinking about, and they also need to know how investors judge a firm’s performance and thus determine its stock price. So, if you decide to make finance your career, you will need to know something about all three areas.

But suppose you do not plan to major in finance. Is the subject still important to you? Absolutely, for two reasons: (1) You need a knowledge of finance to make many personal decisions, ranging from investing for your retirement to decid- ing whether to lease versus buy a car. (2) Virtually all important business deci- sions have financial implications, so important decisions are generally made by teams from the accounting, finance, legal, marketing, personnel, and production departments. Therefore, if you want to succeed in the business arena, you must be highly competent in your own area, say, marketing, but you must also have a familiarity with the other business disciplines, including finance.

Thus, there are financial implications in virtually all business decisions, and nonfi- nancial executives simply must know enough finance to work these implications into their own specialized analyses.1 Because of this, every student of business, regard- less of his or her major, should be concerned with financial management.

1 It is an interesting fact that the course “Financial Management for Nonfinancial Executives” has the highest enrollment in most executive development programs.

F I N A N C I A L M A N AG E M E N T I N T H E N E W M I L L E N N I U M

When financial management emerged as a separate field of study in the early 1900s, the emphasis was on the legal aspects of mergers, the formation of new firms, and the various types of securities firms could issue to raise capital. Dur- ing the Depression of the 1930s, the emphasis shifted to bankruptcy and reor- ganization, corporate liquidity, and the regulation of security markets. During the 1940s and early 1950s, finance continued to be taught as a descriptive, in- stitutional subject, viewed more from the standpoint of an outsider rather than that of a manager. However, a movement toward theoretical analysis began during the late 1950s, and the focus shifted to managerial decisions designed to maximize the value of the firm.

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The focus on value maximization continues as we begin the 21st century. However, two other trends are becoming increasingly important: (1) the glob- alization of business and (2) the increased use of information technology. Both of these trends provide companies with exciting new opportunities to increase profitability and reduce risks. However, these trends are also leading to in- creased competition and new risks. To emphasize these points throughout the book, we regularly profile how companies or industries have been affected by increased globalization and changing technology. These profiles are found in the boxes labeled “Global Perspectives” and “Technology Matters.”

GLOBALIZAT ION OF BUSINESS

Many companies today rely to a large and increasing extent on overseas opera- tions. Table 1-1 summarizes the percentage of overseas revenues and profits for 10 well-known corporations. Very clearly, these 10 “American” companies are really international concerns.

Four factors have led to the increased globalization of businesses: (1) Im- provements in transportation and communications lowered shipping costs and made international trade more feasible. (2) The increasing political clout of consumers, who desire low-cost, high-quality products. This has helped lower trade barriers designed to protect inefficient, high-cost domestic manufacturers and their workers. (3) As technology has become more advanced, the costs of developing new products have increased. These rising costs have led to joint ventures between such companies as General Motors and Toyota, and to global operations for many firms as they seek to expand markets and thus spread development costs over higher unit sales. (4) In a world populated with multi- national firms able to shift production to wherever costs are lowest, a firm whose manufacturing operations are restricted to one country cannot compete unless costs in its home country happen to be low, a condition that does not

F I N A N C I A L M A N AG E M E N T I N T H E N E W M I L L E N N I U M

T A B L E 1 - 1

PERCENTAGE OF REVENUE PERCENTAGE OF NET INCOME COMPANY ORIGINATED OVERSEAS GENERATED OVERSEAS

Chase Manhattan 23.9 21.9 Coca-Cola 61.2 65.1 Exxon Mobil 71.8 62.7 General Electric 31.7 22.8 General Motors 26.3 55.3 IBM 57.5 49.6 McDonald’s 61.6 60.9 Merck 21.6 43.4 Minn. Mining & Mfg. 52.1 27.2 Walt Disney 15.4 16.6

SOURCE: Forbes Magazine’s 1999 Ranking of the 100 Largest U.S. Multinationals; Forbes, July 24, 2000, 335–338.

Percentage of Revenue and Net Income from Overseas Operations for 10 Well-Known Corporations

Check out http:// www.nummi.com/ home.htm to find out more about New United Motor Manufacturing, Inc.

(NUMMI), the joint venture between Toyota and General Motors. Read about NUMMI’s history and organizational goals.

C H A P T E R 1 � A N O V E R V I E W O F F I N A N C I A L M A N AG E M E N T8

necessarily exist for many U.S. corporations. As a result of these four factors, survival requires that most manufacturers produce and sell globally.

Service companies, including banks, advertising agencies, and accounting firms, are also being forced to “go global,” because these firms can best serve their multinational clients if they have worldwide operations. There will, of course, al- ways be some purely domestic companies, but the most dynamic growth, and the best employment opportunities, are often with companies that operate worldwide.

Even businesses that operate exclusively in the United States are not immune to the effects of globalization. For example, the costs to a homebuilder in rural Nebraska are affected by interest rates and lumber prices — both of which are de- termined by worldwide supply and demand conditions. Furthermore, demand for the homebuilder’s houses is influenced by interest rates and also by conditions in the local farm economy, which depend to a large extent on foreign demand for wheat. To operate efficiently, the Nebraska builder must be able to forecast the de- mand for houses, and that demand depends on worldwide events. So, at least some knowledge of global economic conditions is important to virtually everyone, not just to those involved with businesses that operate internationally.

INFORMATION TECHNOLOGY

As we advance into the new millennium, we will see continued advances in com- puter and communications technology, and this will continue to revolutionize the way financial decisions are made. Companies are linking networks of personal

During the past 20 years, Coca-Cola has createdtremendous value for its shareholders. A $10,000 investment in Coke stock in January 1980 would have grown to nearly $600,000 by mid-1998. A large part of that im- pressive growth was due to Coke’s overseas expansion program. Today nearly 75 percent of Coke’s profit comes from overseas, and Coke sells roughly half of the world’s soft drinks.

More recently, Coke has discovered that there are also risks when investing overseas. Indeed, between mid-1998 and Janu- ary 2001, Coke’s stock fell by roughtly a third—which means that the $600,000 stock investment decreased in value to $400,000 in about 2.5 years. Coke’s poor performance during this period was due in large part to troubles overseas. Weak economic conditions in Brazil, Germany, Japan, Southeast Asia, Venezuela, Colombia, and Russia, plus a quality scare in Bel- gium and France, hurt the company’s bottom line.

Despite its recent difficulties, Coke remains committed to its global vision. Coke is also striving to learn from these difficul- ties. The company’s leaders have acknowledged that Coke may have become overly centralized. Centralized control enabled Coke to standardize quality and to capture operating efficiencies, both of which initially helped to establish its brand name throughout the world. More recently, however, Coke has become concerned

that too much centralized control has made it slow to respond to changing circumstances and insensitive to differences among the various local markets it serves.

Coke’s CEO, Douglas N. Daft, reflected these concerns in a re- cent editorial that was published in the March 27, 2000, edi- tion of Financial Times. Daft’s concluding comments appear below:

So overall, we will draw on a long-standing belief that Coca- Cola always flourishes when our people are allowed to use their insight to build the business in ways best suited to their local culture and business conditions.

We will, of course, maintain clear order. Our small corpo- rate team will communicate explicitly the clear strategy, pol- icy, values, and quality standards needed to keep us cohe- sive and efficient. But just as important, we will also make sure we stay out of the way of our local people and let them do their jobs. That will enhance significantly our ability to unlock growth opportunities, which will enable us to consis- tently meet our growth expectations.

In our recent past, we succeeded because we understood and appealed to global commonalties. In our future, we’ll succeed because we will also understand and appeal to local differences. The 21st century demands nothing less.

COKE RIDES THE GLOBAL ECONOMY WAVE

For more information about the Coca-Cola Company, go to http://www.thecoca- colacompany.com/world/

index.html, where you can find profiles of Coca-Cola’s presence in foreign countries. You may follow additional links to Coca-Cola web sites in foreign countries.

9F I N A N C I A L M A N AG E M E N T I N T H E N E W M I L L E N N I U M

eTOYS TAKES ON TOYS “ ” USR

The toy market illustrates how electronic commerce is chang-ing the way firms operate. Over the past decade, this market has been dominated by Toys “ ” Us, although Toys “ ” Us has faced increasing competition from retail chains such as Wal- Mart, Kmart, and Target. Then, in 1997, Internet startup eToys Inc. began selling and distributing toys through the Internet.

When eToys first emerged, many analysts believed that the Internet provided toy retailers with a sensational opportunity. This point was made amazingly clear in May 1999 when eToys issued stock to the public in an initial public offering (IPO). The stock immediately rose from its $20 offering price to $76 per share, and the company’s market capitalization (calculated by multiplying stock price by the number of shares outstanding) was a mind-blowing $7.8 billion.

To put this valuation in perspective, eToys’ market value at the time of the offering ($7.8 billion) was 35 percent greater than that of Toys “ ” Us ($5.7 billion). eToys’ valuation was particularly startling given that the company had yet to earn a profit. (It lost $73 million in the year ending March 1999.) Moreover, while Toys “ ” Us had nearly 1,500 stores and rev- enues in excess of $11 billion, eToys had no stores and rev- enues of less than $35 million.

Investors were clearly expecting that an increasing number of toys will be bought over the Internet. One analyst esti- mated at the time of the offering that eToys would be worth $10 billion within a decade. His analysis assumed that in 10 years the toy market would total $75 billion, with $20 billion

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coming from online sales. Indeed, online sales do appear to be here to stay. For many customers, online shopping is quicker and more convenient, particularly for working parents of young children, who purchase the lion’s share of toys. From the company’s perspective, Internet commerce has a number of other advantages. The costs of maintaining a web site and distributing toys online may be smaller than the costs of maintaining and managing 1,500 retail stores.

Not surprisingly, Toys “ ” Us did not sit idly by — it re- cently announced plans to invest $64 million in a separate on- line subsidiary, Toysrus.com. The company also announced an online partnership with Internet retailer Amazon.com. In addi- tion, Toys “ ” Us is redoubling its efforts to make traditional store shopping more enjoyable and less frustrating.

While the Internet provides toy companies with new and in- teresting opportunities, these companies also face tremendous risks as they try to respond to the changing technology. In- deed, in the months following eToys’ IPO, Toys “ ” Us’ stock fell sharply, and by January 2000, its market value was only slightly above $2 billion. Since then, Toys “ ” Us stock has rebounded, and its market capitalization was once again approaching $5 bil- lion. The shareholders of eToys were less fortunate. Concerns about inventory management during the 1999 holiday season and the collapse of many Internet stocks spurred a tremendous collapse in eToys’ stock — its stock fell from a post–IPO high of $76 a share to $0.31 a share in January 2001. Two months later, eToys declared bankruptcy.

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computers to one another, to the firms’ own mainframe computers, to the Inter- net and the World Wide Web, and to their customers’ and suppliers’ computers. Thus, financial managers are increasingly able to share information and to have “face-to-face” meetings with distant colleagues through video teleconferencing. The ability to access and analyze data on a real-time basis also means that quan- titative analysis is becoming more important, and “gut feel” less sufficient, in business decisions. As a result, the next generation of financial managers will need stronger computer and quantitative skills than were required in the past.

Changing technology provides both opportunities and threats. Improved technology enables businesses to reduce costs and expand markets. At the same time, however, changing technology can introduce additional competition, which may reduce profitability in existing markets.

The banking industry provides a good example of the double-edged technol- ogy sword. Improved technology has allowed banks to process information much more efficiently, which reduces the costs of processing checks, providing credit, and identifying bad credit risks. Technology has also allowed banks to serve customers better. For example, today bank customers use automatic teller machines (ATMs) everywhere, from the supermarket to the local mall. Today,

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many banks also offer products that allow their customers to use the Internet to manage their accounts and to pay bills. However, changing technology also threatens banks’ profitability. Many customers no longer feel compelled to use a local bank, and the Internet allows them to shop worldwide for the best deposit and loan rates. An even greater threat is the continued development of elec- tronic commerce. Electronic commerce allows customers and businesses to transact directly, thus reducing the need for intermediaries such as commercial banks. In the years ahead, financial managers will have to continue to keep abreast of technological developments, and they must be prepared to adapt their businesses to the changing environment.

SELF-TEST QUESTIONS

What two key trends are becoming increasingly important in financial man- agement today?

How has financial management changed from the early 1900s to the present?

How might a person become better prepared for a career in financial man- agement?

T H E F I N A N C I A L S TA F F ’ S R E S P O N S I B I L I T I E S

The financial staff’s task is to acquire and then help operate resources so as to maximize the value of the firm. Here are some specific activities:

1. Forecasting and planning. The financial staff must coordinate the plan- ning process. This means they must interact with people from other de- partments as they look ahead and lay the plans that will shape the firm’s future.

2. Major investment and financing decisions. A successful firm usually has rapid growth in sales, which requires investments in plant, equip- ment, and inventory. The financial staff must help determine the optimal sales growth rate, help decide what specific assets to acquire, and then choose the best way to finance those assets. For example, should the firm finance with debt, equity, or some combination of the two, and if debt is used, how much should be long term and how much short term?

3. Coordination and control. The financial staff must interact with other personnel to ensure that the firm is operated as efficiently as possible. All business decisions have financial implications, and all managers — finan- cial and otherwise — need to take this into account. For example, mar- keting decisions affect sales growth, which in turn influences investment requirements. Thus, marketing decision makers must take account of how their actions affect and are affected by such factors as the availability of funds, inventory policies, and plant capacity utilization.

4. Dealing with the financial markets. The financial staff must deal with the money and capital markets. As we shall see in Chapter 5, each firm af- fects and is affected by the general financial markets where funds are

11A LT E R N AT I V E F O R M S O F B U S I N E S S O R GA N I Z AT I O N

SELF-TEST QUESTION

What are some specific activities with which a firm’s finance staff is involved?

raised, where the firm’s securities are traded, and where investors either make or lose money.

5. Risk management. All businesses face risks, including natural disasters such as fires and floods, uncertainties in commodity and security mar- kets, volatile interest rates, and fluctuating foreign exchange rates. However, many of these risks can be reduced by purchasing insurance or by hedging in the derivatives markets. The financial staff is respon- sible for the firm’s overall risk management program, including identi- fying the risks that should be managed and then managing them in the most efficient manner.

In summary, people working in financial management make decisions regarding which assets their firms should acquire, how those assets should be financed, and how the firm should conduct its operations. If these responsibilities are per- formed optimally, financial managers will help to maximize the values of their firms, and this will also contribute to the welfare of consumers and employees.

Sole Proprietorship An unincorporated business owned by one individual.

A LT E R N AT I V E F O R M S O F B U S I N E S S O R GA N I Z AT I O N

There are three main forms of business organization: (1) sole proprietorships, (2) partnerships, and (3) corporations, plus several hybrid forms. In terms of numbers, about 80 percent of businesses are operated as sole proprietorships, while most of the remainder are divided equally between partnerships and cor- porations. Based on the dollar value of sales, however, about 80 percent of all business is conducted by corporations, about 13 percent by sole proprietor- ships, and about 7 percent by partnerships and hybrids. Because most business is conducted by corporations, we will concentrate on them in this book. How- ever, it is important to understand the differences among the various forms.

SOLE PROPRIETORSHIP

A sole proprietorship is an unincorporated business owned by one individual. Going into business as a sole proprietor is easy — one merely begins business operations. However, even the smallest businesses normally must be licensed by a governmental unit.

The proprietorship has three important advantages: (1) It is easily and inex- pensively formed, (2) it is subject to few government regulations, and (3) the business avoids corporate income taxes.

The proprietorship also has three important limitations: (1) It is difficult for a proprietorship to obtain large sums of capital; (2) the proprietor has unlim- ited personal liability for the business’s debts, which can result in losses that

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exceed the money he or she has invested in the company; and (3) the life of a business organized as a proprietorship is limited to the life of the individual who created it. For these three reasons, sole proprietorships are used primar- ily for small-business operations. However, businesses are frequently started as proprietorships and then converted to corporations when their growth causes the disadvantages of being a proprietorship to outweigh the advantages.

PARTNERSHIP

A partnership exists whenever two or more persons associate to conduct a noncorporate business. Partnerships may operate under different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the secretary of the state in which the partnership was formed. The major advantage of a partnership is its low cost and ease of formation. The disadvantages are similar to those associated with proprietorships: (1) unlim- ited liability, (2) limited life of the organization, (3) difficulty of transferring ownership, and (4) difficulty of raising large amounts of capital. The tax treat- ment of a partnership is similar to that for proprietorships, which is often an advantage, as we demonstrate in Chapter 2.

Regarding liability, the partners can potentially lose all of their personal as- sets, even assets not invested in the business, because under partnership law, each partner is liable for the business’s debts. Therefore, if any partner is un- able to meet his or her pro rata liability in the event the partnership goes bank- rupt, the remaining partners must make good on the unsatisfied claims, draw- ing on their personal assets to the extent necessary. The partners of the national accounting firm Laventhol and Horwath, a huge partnership that went bank- rupt as a result of suits filed by investors who relied on faulty audit statements, learned all about the perils of doing business as a partnership. Thus, a Texas partner who audits a business that goes under can bring ruin to a millionaire New York partner who never went near the client company.

The first three disadvantages — unlimited liability, impermanence of the or- ganization, and difficulty of transferring ownership — lead to the fourth, the difficulty partnerships have in attracting substantial amounts of capital. This is generally not a problem for a slow-growing business, but if a business’s prod- ucts or services really catch on, and if it needs to raise large amounts of capital to capitalize on its opportunities, the difficulty in attracting capital becomes a real drawback. Thus, growth companies such as Hewlett-Packard and Mi- crosoft generally begin life as a proprietorship or partnership, but at some point their founders find it necessary to convert to a corporation.