June 30, 2023
by Heather Schlesser
“Sweat equity” is a term that is loosely used to define how established farmers use payment of a commodity or capital asset to replace some of the cash wages for employees. Sweat equity is also the term sometimes used to compensate a successor for years of labor and management that helped build the owner generation’s wealth. When considering labor compensation in forms other than money, the goals of the employer and employee-successor should be analyzed to ensure it is an appropriate compensation package.
If the employee wants to learn more about the farm business and gain management or marketing skills, commodity payments can provide a way for this on a smaller scale. Payment of grain allows the employee to make decisions about how to market the grain. Market livestock can provide additional skill development as the employee makes management decisions to raise the animals. From the employer’s perspective, skill development can translate into a better employee who can be given more responsibilities.
If the employee’s goal is to manage their own herd, breeding stock payments are a viable option. It is important to consider where the animals will be housed. Will the animal stay in the original herd at freshening or be moved to a different farm? How will feed and other ownership costs be paid, and how will milk income be distributed?
Sweat equity is as valuable as cash equity and should have a one-to-one conversion rate. It is, therefore, important to correctly value the items being given as sweat equity. Some commodities have a worldwide market, and this market value can more easily determine their value. Other commodities produced on-farm, such as cattle, may be undervalued if the animal can command a premium above what they could be harvested for.
An appraiser may be called in for these animals to determine their value. This is most commonly done for insurance purposes but can also help determine your herd’s baseline value. To assess the animal’s worth, the appraiser will evaluate the quality of the animal, which may include a comparison of your animals to animals of similar quality that have recently been sold.
Transferring farm assets
When the goal is to transfer business assets to the next generation, sweat equity can provide the transfer of assets to the successor. For example, breeding stock can be transferred to the successor over time, allowing them to own a significant portion of the herd. This mode of equity transfer can be facilitated by forming a business entity that owns farm assets as shares or interests. These shares or interests can then be transferred to the successor.
This option, when clearly outlined in a farm succession plan, can guarantee the successor generation that the assets will be transferred and removes the speculation surrounding a verbal promise. One thing to consider with this option is how many of the assets can and should be transferred in this way. Is the owner generation dependent on these assets for retirement? If so, how many of the assets can be provided in trade for labor, and how many must be retained by the owner or sold to the next generation for cash to fund retirement needs?
Using sweat equity to compensate employees allows their compensation to match their contribution without financially burdening the farm. For those looking to succeed the owner generation, sweat equity allows them to build equity and confidence before the succession occurs. It is important to consider if the compensation is equitable for the work done.
Schlesser is the University of Wisconsin Extension agriculture agent in Marathon County.
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