Sweat Equity Value for the Entrepreneur and Investor

Saturday, 30 January 2010 15:31

Most entrepreneurs build their businesses with sweat equity and Most businesses fail within the first three years. Even more interesting is that most businesses that survive, just break even, with even less businesses ever making a profit.

Entrepreneurs often fail to recognize, is keeping a business alive with sweat equity, is still burning money, the entrepreneur's money.

Sweat equity should be used to launch a business and to provide incentive to talented employees willing to make a commitment to your business.

Sweat Equity Value Calculations

Sweat equity should be calculated, the same as it would be for anyone else, considering the amount of hours worked, and then what would you have made working for someone else. An entrepreneur should be even more vigilant about tracking sweat equity hours allowing them to understand their investment in the business.

If you are working for sweat equity, you need to consider two major questions:

  1. "How long you are willing to put sweat equity  in without making what you would make somewhere else?
  2. "Even if you are able to recover your sweat equity, do you clearly see strong income potential for taking the risk to build your business?"

Your answer to those questions should dictate if your are simply keeping your business afloat by providing sweat equity, or are you actually building a business with considerable potential.

Sweat Equity And Negotiations With Investors

Sweat equity will also come into play when you seek outside capital from investors. They want to know how you are valuing the business, if the business has real opportunity to make a substantial profit, and if it is capable of paying you a reasonable salary to build the business.

Sometimes, investors will use sweat equity to devalue your position in the business, but if you are fair, and use the formula above, you should be able to hold your ground.

Remember, an investor needs to see profit potential, and that includes you, with your investment of sweat equity.