How To Set A Value For Sweat Equity
January 28, 2021
Make a clear plan for contribution and compensation
What young farmers often lack in experience and assets they make up for with labor and energy. An heir joins the farm and starts harvesting experience. In return, the farm owners receive help and new ideas.
This arrangement is commonly known as sweat equity, explains Wesley Tucker, University of Missouri Extension agricultural business specialist. An heir is establishing his or her spot at the farm.
“Sweat equity is earned when a person’s efforts cause an increase in the value of an asset, often an asset owned by someone else,” he says. “Your direct actions (blood, sweat and tears) lead to an asset becoming more valuable.”
Link Dollars to Effort
The concept is simple, but in most cases, heirs earn sweat equity but aren’t actually compensated for it.
“In many cases, sweat equity is a nice way of saying ‘indentured servitude,’” says Shannon Ferrell, ag law professor at Oklahoma State University Extension.
Through planning, you can easily make an exchange for labor to ownership work. Tucker suggests asking these questions:
Did an heir’s efforts lead to an increase in the value of an owner’s assets?
How has the heir been compensated while working in the family business?
“Essentially you need to determine if your son or daughter is being compensated for what they are contributing to the family business,” Tucker says. “In some businesses, children spend their entire lives working on the family farm and are paid much below what he or she could make at a job in town.”
The Path Forward
These conversations will help shift the perception and assumptions of a potential successor, Ferrell says.
“You need to have a deep and meaningful dialogue about how working on or owning the farm is an opportunity, not an entitlement,” he says. “Explain how they can contribute labor and/or capital under specific guidelines.”
Once you decide how to handle contribution and compensation, share the plan with on-farm and off-farm children.