"And at the end of that story no matter what you were reporting in earnings you would be out 100K in wealth (on average)."
Wayne, let's say I own a hot dog stand. It's a nice little hot dog stand. Let's say it has a nominal value of 100k and generates an income of 20k per year for me after overhead. I need to, and can afford to pay 30k a year to hire a manager. I have a choice, of hiring a pimply faced kid who will do his time and maintain the status quo, or a fellow named Nathan who wants an option to buy half for 50k + the 30k per year. I can see that Nathan is truly gifted when it comes to hot dogs, so I make the deal. Where is the cost to me? I would have paid 30k per year for a manager regardless. If he maintains the status quo he's not going to be able to come up with the 50k to buy half the business. But let's say he does. I now have half interest in the hot dog stand worth 50k, and 50k in cash for a total of 100k, which is exactly the equity with which I started. But, Nathan being the hot dog genius that he expands the business. Soon the business expands out, and there are 4 hot dog stands worth 400k. Nathan exercises his option and buys the half interest for 50k. I now have 200k in equity, and 50k in cash. I'm hard pressed to see where there is a cost. Of course there is the risk that Nathan could run the business into the ground, but there is also that risk, perhaps even moreso, when hiring the unmotivated pimply faced kid.
Now, what am I missing?
Regards,
Barb |
