Earlier this year, I fielded two coaching conversations. In one, the next generation was working for “free” – that is, they were not getting paid at all. Another young guy reached out because his dad was offering him $18 an hour while I suspect $30 is the right wage.
The new term for sweat equity is “delayed compensation.” The FCC recently broached this topic (Calculating sweat equity - how to get it right and make it fair). What the article misses is how to have the conversation about getting expectations written into signed operating agreements.
Here’s what consultant farmers Andrew Deruyck and Mark Sloane wrote 11 years ago: “Ned Needshalp found himself in a pickle when his hired man of 15 years, Steady Teddy, retired. Ned operates a sizable grain farm that has very high seasonal labour requirements. Ned is 55 years old and was faced with the decision to downsize, quit or begin training new help. His son Fred expressed an interest in the farm but was concerned with the capital requirement and risk associated with purchasing the entire operation. They reached an agreement in which Fred would work on the farm for a salary they agreed upon of $50,000 per year, $30,000 of which Fred uses to live and $20,000 of which remains invested in the farm with a 7.5% return (2011, remember). This investment is kept track of – and if Fred decides to take over the farm some day, this will form part of his down payment.”
(Author’s note: The trouble is that in today’s reality a farm family needs $74,000 for living, then more to pay service debt, if they are buying equity. We all know what the price of land has done in the last decade; Fred cannot afford to buy all the land.)
“S. Jobbs has held several prominent executive positions in the corporate world. He has climbed the corporate ladder two rungs at a time – however, he felt torn between continuing his prominent corporate career and returning to the family farm. After much soul-searching, Jobbs decided to give the farm a chance. His parents, encouraged to support his decision, felt that a fair approach to the situation was to offer him the same executive salary he was making in the corporate world. His drawings from the farm were only a quarter of the salary; however, it was expected he pays fair market value for the farm. Similarly to the previous example, the difference between the salary and the drawings would remain invested in the farm.”
(Author’s note: I have corporate-salaried farmers working for free on the family farm with the expectation of cashing out the land when parents are deceased. Their spouses are not happy about the free labour and wonder how funds will be allocated if a successor son dies early. Are spouses going to be compensated for years of free labour? How?)
“Ed Jimcated ran a successful farm his entire life on a grade 9 education and was successful doing it. He placed no value on formal education. Keeping his son Ed Junior on the farm and avoiding the cost of sending him for post-secondary education, he offered his son the value of the education in equity in the farm. Ed had two other children who he sent to the big city for some schooling, and it cost him $15,000 in room, board, tuition and books. In addition, he figured $25,000 per year was missed if the children had been working full time. He offered Ed Junior $40,000 per year for five years, a total of $200,000 with a 7.5% return if he would stay home and work with him on the farm for five years. At the end of the five years, this sweat equity could be rolled into ownership on the farm, or he could take his money and run.”
(Author’s note: The educated siblings likely know the value of the farm, and if Ed is going to run, I suspect they also want a piece of the value of total farm assets. The parents are avoiding this tough conversation about expectations that are not workable. Ed and his aging wife need to be taken care of first with a $80,000 a year or more income stream. I sure hope they were smart to build up a personal wealth bubble beyond the farm assets.)
“Kary Kepitgoin is a fourth-generation farmer and can’t imagine selling the farm on his watch. He wanted someone in the family to take over the operation and was willing to give it all away to see the operation continue. There was one problem: His wife wanted some sense of fairness to the children who decided not to farm. Their son enjoyed the farm work, however, had very realistic expectations of profit on the operation – and because they were at established jobs, his wife was not willing to take the risk without some certainty they would own the necessary assets for a sustainable farm in the future. Kary and his wife agreed to sell the farm in the future at a reasonable price that would easily cashflow, and the difference between this price and market value would be called sweat equity. This was discussed with the other siblings, and everyone agreed.
“In summary, the four situations demonstrate four different examples of calculating sweat equity. The decision to use or not to use sweat equity is very individual. However, if you are going to use sweat equity, it is important to predetermine its value. Where we have seen major problems is in situations where open discussion has not taken place and there are vastly different expectations of sweat equity value and terms within the same business team.”
You need to talk about fair compensation and pay wages on your farm. You need written agreements that outline what terms for payment in the future were agreed to and let the non-farm heirs know why certain decisions were made.
This how-to conversation is now more complicated with increased living costs, professional ag salaries and parents who still have not used a financial planner to outline their income streams.
