The Sweat Equity Trap

Sweat Equity…  A means to pass on the family legacy, or a carrot dangled in front of an adult child to coerce them to stay on the family place? This might be a hot take, but as a transition and succession planner, I do not support traditional sweat equity. 

Sweat equity in agriculture is generally understood as an exchange of farm/ranch assets in return for labor, when traditional compensation and benefits don’t fully account for fair or equitable wages. 

When this agreement fails, it’s often because the assets aren’t exchanged when the labor is provided… or sometimes not at all. This can happen for a lot of reasons, but can almost always be avoided by a binding agreement between the parties, and follow through.

I prefer to include compensation for all employees in the operating agreement. Yes, even Dad & Mom. Compensation outlined within the operating agreement should include any and all wages and benefits that the employee earns, encompassing the following: cash wages- hourly/salary, bonuses, other compensation/perks- annual asset transfer, retirement contributions, housing, transportation, fuel, meat, groceries, and benefits: health/ life insurance, etc. By calculating the financial value of all compensation, everyone has the information they need to determine if this agreement is equitable or if changes should be made. 

When sweat equity is a part of compensation, the best practice is to transfer those assets annually. If you are the employee accepting sweat equity as a means of compensation, I beg of you not to accept a vague “you’ll receive the lion’s share of the place, one day…” response from the asset owners. As we know, life can change in a hurry, and you deserve to know what to expect.  

If you’re wondering what else should be included in an operating agreement, be sure to look for our next blog post!

Feel free to share this website with someone you think would benefit from more transition and succession planning knowledge.