What’s fair when everyone contributes to the farm differently?
Business Advisor
Calgary, AB
Two things are needed to run a business: time and money. Family partners may be contributing labour, management, financing, or all of these. To find balance and harmony, you need to have conversations that ensure all contributions are valued in a way everyone pro-actively agrees to.
I see situations where one sibling works on the farm full time and the other works on the farm part time. The on-farm sibling reaps the benefits of the farming lifestyle, while the other off-farm sibling has comparatively significant disposable income. Each benefit has value, and that value may be viewed differently by different people.
Or, a younger producer might not yet be at a management level with the farm but is learning new skills and contributing in meaningful ways. What is the value of those things? It’s important to communicate about this and find agreement on this or resentment can begin to creep in.
A good way to find balance in such cases is to track gains over time. As a family, set expectations for future gains. Decide together what’s possible financially. Think about how much cash flow is needed to sustain retirement or to add on other assets in the future.
Ensure there is clarity around decisions. Know how many full-time or part-time employees the operation can afford to help ensure expectations are realistic. If the business doesn’t have the capacity to employ all children full time, can the part-time individual(s) convert their sweat equity into future ownership?
Business Advisor, FCC
Regina, SK
I think one of the most effective ways to ensure things feel fair and balanced is to put governance processes in place.
Governance is the process you use to avoid relationship breakdown. It allows you to design your own set of rules around how contributions are valued, recorded, tracked and compensated for.
Without governance, the word ‘fair’ may not hold much meaning, as fairness is what you design it to be. Everyone needs to be involved in deciding what is fair together.
For example, someone may contribute through dollars instead of hours, and fairness will depend on the policies you set (through governance) around how that contribution is measured and valued. If you’re measuring to determine equity of compensation, what is fair needs to be pre-defined and agreed upon.
When setting up a governance process, there are four main areas to begin with: decision-making, communication, conflict resolution and compensation.
Decide what you, as a family, want to determine within each area. While there is no ‘right’ way to do this, there are tools and ways to determine it, and governance helps to decide which ones are right for you.
A facilitator can help decide what to include, ensuring that everyone has an equal opportunity to contribute to determining what is important to them, and how that is measured or valued. They can help to set rules around compensation, communication and conflict resolution – how are we governed as a group? Down the road, if there happens to be an objection, you will have rules around conflict resolution and then use those to determine compensation.
Overall, governance is the process of defining what is fair. It allows both sides to build the definition so that all sides have been fully involved. This ensures everyone is aligned, has made agreements and feels empowered.
A sweat equity formula
This formula, created by Merle Good, farm succession specialist with GRS Consulting, can be used to determine value and find balance. It shows you are worth more than the farm can afford to pay you:
Value = Cash + Perks (fuel, rent, etc.) + Equity
Example 1
The full-time junior generation is worth $120,000 (above and beyond labour). While they only take home a salary of $55,000, they’re owed $65,000 in “sweat equity” for 2023. That sweat equity needs to be tracked and recorded. It’s included in the balance sheet when the equity is converted to ownership – examples may be shares, land or operational assets such as cattle.
Example 2
A sister works off farm part time. She hasn’t taken any cash out but has put money in. She receives a credit – which is all equity. This needs to be tracked from year to year. While this isn’t part of the balance sheet, it needs to be recorded. Everyone must agree on the expectations and formula for converting sweat equity to real equity, and the numbers must be transparent.
Families can track their equity in an online journal that is reviewed annually, and that everyone has access to.
To determine your family’s annual expectations for how this sweat equity will be converted to ownership, ask the following questions:
What are the expectations for when/how this equity will be converted and into what asset?
How are we addressing time value of money?
How is this being addressed in the parents’ estate plan?
Keep the lines of communication open and share evolving expectations. Include everyone’s goals and vision including individual family goals.
Formalize the process and discussions around this and set expectations for future gain – and track it!
From an AgriSuccess article.