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What is sweat equity?

On Behalf of | Apr 19, 2021 | Business Law |

For business owners, sweat equity can be very valuable, though often hard to pin down specifically. This is important to consider when selling the business or bringing on new investors and partners.

Sweat equity is the sum of the effort and work you put in to increase the value of the company. You may not have receipts for this the way that you do for parts and materials, but that doesn’t mean it’s not worth anything.

Doing the labor yourself

One example is if you decide to do the labor on your own. Say you’re running a brewery and looking to expand and add outdoor seating. You get a quote and a builder wants $50,000 to do the job. You run the numbers on materials, though, and it’s only $20,000.

You end up doing the work yourself. This takes weeks, but you save $30,000. That’s the value of your time and effort. If the brewery was worth $900,000 before, the actual receipts may show that now you just have $920,000 invested in the business. But you know that you really have $950,000 in it, as that’s what it would have cost anyone else to get to the same position.

What is your company worth?

You may also need to consider how the improvements have increased the appeal. If your sales go up with the new outdoor space, it could be worth even more to an investor than just the money or time you spent.

When dealing with investments and other financial decisions, accurate valuations are important. You must know what the company is really worth and what legal options you have as you work through the process.