Question: You and 4 friends get together and purchase a car wash. Things start out really well and the business is able to pay out a portion of its profits to the 5 of you every year. It's a very comfortable investment and everyone feels secure.
Year after year, the car wash operates well. After a few years, some of the profits and a small amount of debt are used to take on a little real estate and a few stocks. Things continue to go well year after year but then one year there is a freak snowstorm. The weather turns cold and rainy and the company has a bad year; nobody is coming to use the car wash.
The 5 of you for a variety of reasons have come to rely on that dividend the car wash pays out every year, so the group of you decide that instead of forgoing the dividend that year, you would take on a new partner and each person would reduce their holdings to 1/6 of a share instead of 1/5. The cash injection the car wash would receive would improve the business and would ensure everyone gets paid their dividend.
Because nobody really knows what stocks and real estate holdings are on the car wash's balance sheet by this time, you end up having a little trouble finding a new partner. But in the end you do find one. However, this new partner doesn't want to pay what the group thinks he should pay; he makes an offer to pay for a stake that is based on what the business was worth in 2004. All of you agree to it and the deal is done.
IS THIS A WISE BUSINESS DECISION??
"They misunderestimated me." --George W. Bush, November 6, 2000