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Understanding Net Value

1. What is Net Value?

Net Value represents the real economic interest a BEE partner has in a company, after deducting any acquisition debt related to their shareholding. It’s not just about holding shares; those shares must have unencumbered value for the BEE partner to receive full recognition on the BEE scorecard. It’s essentially the BEE partner’s “equity” in their ownership stake.

2. Why is Net Value Important?

The BEE Codes prioritize Net Value to prevent “fronting” – situations where black individuals hold shares on paper but don’t genuinely benefit. The Net Value rules ensure that BEE ownership contributes to real economic empowerment. A higher Net Value translates to better scoring on the ownership element of the scorecard.

3. The Basic Calculation (Simplified)

The fundamental concept is:

Net Value = Value of Shares Held by BEE Partner – Acquisition Debt related to those shares

Example:

BEE partner acquires 25% of Company X.
Total value of Company X = R10 million.
Value of BEE partner’s shares = R2.5 million (25% of R10 million).
BEE partner borrowed R1.5 million to buy the shares.
Net Value = R2.5 million – R1.5 million = R1 million.

4. The Time-Based Graduation Factor and Target Net Value (The Accurate Explanation)

The BEE Codes use two interconnected mechanisms to ensure that BEE partners build up Net Value over time, even if their initial debt is high:

Target Net Value: This is the minimum Net Value the BEE partner should achieve at various stages after the transaction. It’s a percentage of the total company value, and this percentage increases over a 10-year period.
Time-Based Graduation Factor (TBGF): This factor is used within the Economic Interest formula to gradually increase the recognized level of BEE ownership, even if the actual Net Value hasn’t reached the Target Net Value yet.

Here’s the schedule (from Annexe 100(E) of Statement 100):

Time Period	Target Percentage	Time-Based Graduation Factor (C in Formula A/B)
First year after the current equity interest date	10%	10%
Second year after the current equity interest date	20%	20%
First day of the third year to the last day of the fourth year after the current equity interest date	40%	40%
First day of the fifth year to the last day of the sixth year after the current equity interest date	60%	60%
First day of the seventh year to the last day of the eighth year after the current equity interest date	80%	80%
First day of the ninth year to the last day of the tenth year after the current equity interest date	100%	100%

5. The Economic Interest Formulas:

The level of recognized Economic Interest (which determines ownership points) is calculated using these formulas:

Formula A (Used on the Time-Based Graduation Dates):Economic Interest Carried = (A / B) * C * D Where:
- A: The lower of:
  - The actual Net Value of the BEE shares at the measurement date.
  - The Target Net Value at the measurement date.
- B: The value of the company at the measurement date.
- C: The Time-Based Graduation Factor (from the table above, as a decimal).
- D: The percentage of shares held by black people.
Formula B (for use at any time):
This formula pro-rates the Economic Interest points between the Time Based Graduation Dates. Economic Interest Carried = (A / B) * C * D Where:
- A: The lower of:
  - The actual Net Value of the BEE shares at the measurement date.
  - The “Target Net Value” at the measurement date (explained below), pro-rated for the period since the last measurement date.
- B: The value of the company at the measurement date.
- C: The Time-Based Graduation Factor for the period since the last measurement date (as a decimal – e.g., 40% = 0.4).
- D: The percentage of shares held by black people.

6. Calculating Target Net Value:

Target Net Value = Value of the Company * Target Percentage (from the table above)

7. Comprehensive Example:

BEE Partner holds 25% of Company X.
Company X Value = R10 million (constant for simplicity).
Acquisition Debt = R1.5 million (constant for simplicity).
Actual Net Value = R2.5 million – R1.5 million = R1 million (constant).

Here’s how the recognized Economic Interest is calculated over time:

Year 1:
- Target Net Value: R10m * 10% = R1 million
- A = min(R1m, R1m) = R1m
- Economic Interest = (R1m / R10m) * 0.10 * 0.25 = 0.0025, or 0.25%
Year 3:
- Target Net Value: R10m * 40% = R4 million
- A = min(R1m, R4m) = R1m
- Economic Interest = (R1m / R10m) * 0.40 * 0.25 = 0.01, or 1%
Year 5:
- Target Net Value: R10m * 60% = R6m
- A = min(R1m, R6m) = R1m
- Economic Interest = (R1m / R10m) * 0.60 * 0.25 = 0.015 or 1.5%
Year 7:
- Target Net Value: R10m * 80% = R8 million
- A = min(R1m, R8m) = R1m
- Economic Interest = (R1m / R10m) * 0.80 * 0.25 = 0.02, or 2%
Year 9 (and beyond):
- Target Net Value = R10m * 100% = R10m
- A = min(R1m, R10m) = R1m
- Economic Interest = (R1m/R10m) * 1 * 0.25 = 0.025, or 2.5%

8. Key Considerations:

Valuation Date: The company’s value isn’t static. It must be determined at each measurement date, affecting Net Value.
Third-Party Rights: Security held by third parties (e.g., a bank) over the BEE partner’s shares can reduce Net Value.
Carrying Value of Debt: The outstanding acquisition debt is the carrying value (accounting value), not the original loan amount.
Flow-Through and Modified Flow-Through: The examples use the “flow-through” principle. The “modified flow-through” principle can be used in certain circumstances, effectively ignoring non-compliant entities in the ownership chain.
Subminimum: There is a subminimum requirement of 40% of the Net Value points (i.e. 3.2 points out of 8) in order to avoid being discounted one level down on the overall scorecard.

In Summary:

Net Value is a critical measure of the real economic benefit a BEE partner receives. The Time-Based Graduation Factor and Target Net Value work together to recognize progress towards full, unencumbered ownership over a 10-year period. The Economic Interest formulas, using these mechanisms, determine the actual ownership points awarded. Always consult the official Codes of Good Practice and seek professional advice. This explanation is based on the accurate information from the Amended Codes.