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Typical ways to finance a BEE deal:

Here’s a breakdown of the common methods of financing BEE deals, keeping in mind the legal, accounting, tax, and BEE aspects:

1. General Principles

  • BEE Scorecard Impact: Ownership is a priority element, contributing significantly to the BEE scorecard.
  • Value Creation: The goal is not just compliance, but genuine value creation for the BEE partner and the company.
  • Sustainability: The financing structure must be sustainable, allowing the BEE partner to service any debt and ultimately realize the value of their investment.

2. Common Financing Methods

Here are the usual suspects:

  • Vendor Financing:
    • The company itself provides a loan to the BEE partner to acquire shares.
    • This is often seen as an easy and efficient way to get a deal done.
    • Structure: Typically, the BEE partner will form a special purpose vehicle (“SPV”) to hold the shares and it will be the borrower in the transaction. The Company will lend an amount to the SPV. The SPV will use that amount plus any equity contribution by the BEE partner to subscribe for shares in the Company.
    • Considerations:
      • Terms: The loan should have market-related terms (interest rate, repayment schedule).
      • Security: The company might take security over the shares held by the BEE partner.
      • Tax: Interest income will be taxable in the hands of the company, and the BEE partner may be able to deduct interest expenses (subject to limitations).
      • Solvency and Liquidity: Section 44 of the Companies Act may apply. The directors of the Company will need to pass a solvency and liquidity test before the Company can lend the money.
  • Third-Party Financing (Bank Loan):
    • The BEE partner (usually via an SPV, as above) obtains a loan from a bank or other financial institution.
    • Considerations:
      • Security: The bank will likely require security, which could include a pledge of the shares, personal guarantees from the BEE partner, or other assets.
      • Interest Rate: The interest rate will depend on the BEE partner’s creditworthiness and the perceived risk of the investment.
      • Repayment: The loan repayment schedule must be aligned with the expected cash flows of the business.
  • Preference Share Funding:
    • The company issues preference shares to the BEE partner (again, usually via an SPV).
    • Structure: Preference shares rank ahead of ordinary shares for dividends and capital repayments. They can be structured with various features, such as:
      • Cumulative vs. Non-Cumulative: Cumulative preference shares accrue unpaid dividends, while non-cumulative dividends do not.
      • Redeemable vs. Non-Redeemable: Redeemable preference shares can be bought back by the company at a specified time or under certain conditions.
      • Participating vs. Non-Participating: Participating preference shares may receive additional dividends if the company performs well.
    • Considerations:
      • Dividend Yield: The dividend yield should be market-related and sustainable for the company.
      • Tax: Preference share dividends are not tax-deductible for the company, but may be exempt from dividends tax in the hands of the BEE partner if structured correctly.
      • BEE Codes: The specific terms of the preference shares must comply with the BEE Codes to ensure recognition of the BEE ownership points.
      • Solvency and Liquidity: Section 46 of the Companies Act applies. The directors of the Company will need to pass a solvency and liquidity test before the Company can declare any dividends.
  • Equity Contributions:
    • The BEE partner contributes their own funds to acquire the shares.
    • This shows commitment and reduces the need for external financing.
    • Considerations:
      • Valuation: The company and the BEE partner must agree on a fair valuation of the shares.
      • BEE Codes: Equity contributions are generally given the best recognition under the BEE Codes.
  • Notional Vendor Finance:
    • This is often used where a company cannot or does not want to provide an actual loan.
    • Structure: A notional loan is created, with the value of the shares increasing over time based on a formula (e.g., linked to the company’s performance). The BEE partner benefits from the growth in the value of the shares above the notional loan amount.
    • Considerations:
      • Complexity: These structures can be complex and require careful drafting.
      • BEE Codes: The BEE Codes have specific requirements for notional vendor finance to be recognized.
      • Tax: May attract adverse tax consequences if not structured correctly.

3. A Simple Diagram

Here is a general diagram that shows how a typical vendor-financed deal might work. The same structure would be used for third-party financing, except that the lender would be a bank:

[BEE Partner] --(Equity Contribution)--> [SPV] --(Loan + Equity)--> [Company]
                                         ^
                                         |
                                   (Loan from Company)
                                         |
                                         v
                           [Company] --(Shares)--> [SPV]

Key:

  • BEE Partner: The individual or entity acquiring the BEE stake.
  • SPV (Special Purpose Vehicle): A company created specifically for the BEE transaction.
  • Company: The company implementing the BEE deal.
  • Equity Contribution: Funds provided by the BEE Partner.
  • Loan: Funds provided by the Company (Vendor Finance) or a Bank (Third-Party Finance).
  • Shares: Shares in the Company issued to the SPV.

4. Important Considerations

  • Valuation: A fair and independent valuation of the company is crucial for all financing methods.
  • BEE Codes: All structures must comply with the relevant BEE Codes of Good Practice or Sector Codes.
  • Legal and Tax Advice: It is essential to obtain expert legal and tax advice to ensure the structure is compliant and optimal.
  • Financial Modeling. It is recommened that before any deal is done, that the Company does financial modelling to ensure that the deal makes sense and that the financing is sustainable.
  • Can you get away without financing? Some ownership methods (.e.g. Options) confer the full benefits of ownership without requiring the purchase of the underlying shares i.e. little to zero capital/financing is required.

5. Speak to us

At Tusker we have a solid understanding of the BEE landscape and a variety of funding methods that exist. Chat to us for a no-risk discussion around your businesses requirements and we’ll help with pleasure.

Chapter: Ownership methods
Chapter: Financing a BEE deal:
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