Written by Wesley Tucker, Farm & Ranch Transition Specialist with University of Missouri Extension
Last week I received a heartbreaking phone call. As the caller told me their story, I could feel their pain. After graduation they stayed close to home and helped their parents on the family farm as much as possible. They helped any time they were free on nights and weekends because they knew the parents needed help. They had never been paid anything for the work and relied on a job in town to support their family. Their parents always talked about wanting to make sure the farm stayed in the family, and they knew the parents had seen a lawyer about getting a trust created, so they just assumed one day they would be taken care of. However, now that the parents were gone, the caller discovered the parents’ trust left everything they owned, including the farm, equally to their five children. The caller’s siblings were asking when they could expect to start receiving their money. The caller contacted me because they wanted to know their options. My heart broke when I had to inform them that although they may have been earning sweat equity through the years, unfortunately their parents had not given them credit for it.
This story highlights a common but difficult question which confronts many farm families. That is, how to value individual contributions — including sweat equity — to a family business.
What is sweat equity?
I like to describe sweat equity and its impact on a farm’s value as a piggy bank. Everyone who is part of a farming operation contributes to the farm each year. We contribute our time, money and management (each of which have value) to the business. Our contributions normally increase the value of the business and its assets. Hopefully, we are also taking withdrawals that we use to live on from the business. Unfortunately, farming can be a very poor cash generator with tight margins and low profitability. Often there’s not enough cash generated for everyone to withdrawal as much as they are contributing to the piggy bank. But the assets such as the land may still be increasing in value. If we are contributing more value to the farm than we are withdrawing, then we are building a balance of equity in the business.
Where is our sweat equity located?
What complicates the situation is often our equity is tied up in the increasing value of assets owned by someone else. How do you get compensated when one person’s efforts lead to someone else becoming wealthier? They own the piggy bank we contributed to. While farming may be a poor cash generator, it can be a very good wealth accumulator as assets like farmland increase in value. For example, assume the farm was worth $300,000 when the caller started helping their parents. But today the farm is worth $1.5 million. How should the farm’s value be split among the five children? Should the caller get credit for their efforts through the years if it resulted in the parents’ assets increasing in value and becoming wealthier?
Family members not receiving adequate credit for their sweat equity is a common problem I see all the time. Frequently the equity we helped create is tied up in assets owned by someone else and families don’t take the time to discuss the difficult details because we are afraid of offending someone like sibling off-farm heirs. A few simple discussions to create a framework for valuing someone’s contributions can prevent a lot of heartache and protect family harmony later on. Unfortunately for this caller a “For Sale” sign is likely to appear on a significant chunk of the family farm which is what the parents did not want to see happen. In my next article we will discuss tips and strategies for creating a sweat equity agreement, so everyone is adequately compensated for their contributions.
Wesley Tucker is a Farm & Ranch Transition Specialist with University of Missouri Extension. He has a master’s in agricultural economics from the University of Missouri specializing in estate and succession planning, farm labor management, and beef marketing systems. Wesley has 22 years of experience working directly with agricultural producers throughout the midwest. As a succession planning specialist, Wesley trains and assists families through complicated family dynamic situations as they transition to the next generation so both farm and family have the best chance to be successful.
He serves on the national board of directors for Annie’s Project: Empowering Farm Women and the International Farm Transition Network. A Southwest Missouri native, Wesley grew up on the family beef operation in the Ozarks where he and his wife, Heather, a local veterinarian, and their daughter, Jordan, operate a commercial cow-calf operation today.
