Calculating sweat equity – how to get it right and make it fair
How much is the sweat that you put into your parents’ farm worth? And how should they pay you?
GRS Consulting’s Merle Good grew up in an era when doing chores was expected. You pulled your weight, and your return was three square meals and a place to live.
But when rural life stopped being all about farming, a cultural shift occurred.
Parents needed to explain to their children why they weren’t making more or as much as other kids in school who got an allowance for much less work. The difference, Good points out, is the non-farming kids weren’t gaining equity in a business.
Sweat equity is a form of compensation that considers that few farms have adequate cash-on-hand to fully compensate the next generation’s labours.
“It’s like a deferred wage,” FCC Business Advisor Joel Bokenfohr says in a Farm Marketer podcast. “You’re earning a wage in the short-term while building equity compensation over time.”
Fellow FCC Business Advisor Andrea De Groot explains sweat equity isn’t just the labour contribution of the offspring – it’s about recognizing the next generation as a business partner.
“Maybe you start in a labour position, and then you’re moving to a manager position, and then, ultimately, your end goal is that you want to be a co-owner or a business partner,” De Groot says.
Good says sweat equity goes beyond an hourly salary and considers incentives and expectations.
Sweat equity goes beyond an hourly salary and considers incentives and expectations.
To ensure both sides get a fair deal requires calculating value.
Good says a value formula for labour provided by a child or teenager may simply total cash plus cash equivalents. The latter may just be the worth of, say, using the truck.
The equity side comes into play for a returning adult offspring who may have left the farm for post-secondary education. Much more is expected as the offspring moves up the ladder from labour provider to key employee and manager.
“I want more value than just employment, and that’s why I’m willing to add an equity side,” Good says.
Parents seeking $60,000 a year’s worth of value out of their returning offspring might pay $40,000 of that in cash, with the rest split in cash equivalence (like a home and food) and equity in the business.
Good recommends parents start the conversation about sweat equity with their teens.
“This is a concept that a young person has to understand early: farming is not simply an income game. Farming is an equity game,” Good says. “The sooner you can get that across to a young person, the better they’ll understand your business.”
It’s important to set expectations early on, Bokenfohr says. He also encourages an annual review of sweat equity as part of business planning discussions.
“Being as clear as possible helps make sure those expectations match for all family members,” Bokenfohr said.
Sweat equity is like a deferred income for farm offspring. Starting the conversation early provides a map of performance and compensation expectations for both the older and younger generations.
Article by: Richard Kamchen