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B-BBEE Ownership Method: Sale of Assets

Overview

In this method, a company sells a productive asset (or a group of assets constituting a business unit) to a Black-owned entity. This differs from other methods that involve the transfer of shares in the company. Instead, it involves the direct transfer of ownership of assets that generate revenue. This can be a way for a company to achieve immediate B-BBEE ownership points and potentially unlock value.

How does it work normally?

In a typical (non-B-BBEE) asset sale:

  1. Identify Assets: The seller identifies the specific assets to be sold (e.g., a factory, a division, a brand, a portfolio of contracts).
  2. Valuation: The assets are valued using an appropriate method (e.g., discounted cash flow, asset valuation, market comparables).
  3. Negotiation: The seller and buyer negotiate the terms of the sale, including the price, payment terms, and any warranties or indemnities.
  4. Legal Documentation: An asset sale and purchase agreement is signed.
  5. Transfer: Ownership of the assets is transferred to the buyer.
  6. Payment: The buyer pays the seller for the assets.

What are the BEE rules?

The B-BBEE Codes recognize the sale of assets as a valid ownership transaction, provided certain criteria are met:

  • Productive Asset: The asset(s) must be productive, meaning they generate revenue both before and after the transaction. This is not simply about selling off unwanted assets; it’s about transferring a viable part of the business.
  • Going Concern: The sale must result in the creation of a sustainable business or business opportunity for the Black-owned entity. It should not be a short-term transaction. The ownership achieved only counts if value is measured to have been transferred over a multi-year period.
  • Skills Transfer: The sale should ideally involve the transfer of specialized skills or productive capacity to the Black-owned entity. This enhances the sustainability of the business.
  • Valuation: The assets must be valued at fair market value, as if in a transaction between a willing buyer and a willing seller.
  • Net Value: The Net Value calculation applies. The value created for black people is compared to the total value.
  • No Ongoing Relationship Required: Unlike some other methods, there is no requirement for an ongoing relationship between the seller and the Black-owned entity after the sale (although there might be transitional arrangements).

What’s the spirit?

The spirit is to:

  • Create Black Businesses: Facilitate the creation of viable, sustainable Black-owned businesses.
  • Transfer Economic Value: Transfer real economic value and control to Black people.
  • Promote Skills Transfer: Encourage the transfer of skills and expertise to Black entrepreneurs.
  • Avoid Fronting: Prevent companies from simply selling off unwanted assets to achieve B-BBEE points without genuine empowerment.

The deal process:

  1. Identify Assets: Determine which assets (or business unit) will be sold.
  2. Identify Buyer: Find a suitable Black-owned entity to purchase the assets.
  3. Due Diligence: Both the seller and the buyer conduct due diligence on the assets and each other.
  4. Valuation: Value the assets at fair market value.
  5. Negotiation: Negotiate the terms of the sale (price, payment, warranties, etc.).
  6. Legal Documentation: Draft an asset sale and purchase agreement.
  7. Transfer: Transfer ownership of the assets to the Black-owned entity.
  8. Payment: The Black-owned entity pays for the assets.
  9. B-BBEE Reporting: The seller reports the sale in its B-BBEE verification.
  10. Ongoing review: For at least 3 years after the deal, the actual value transferred relative to the remaining business needs to be audited and verified. This is not a ‘one and done’ deal.

Pros & cons of this method

Pros:

  • Immediate B-BBEE Points: The seller can achieve B-BBEE ownership points relatively quickly.
  • Cash Inflow: The seller receives cash for the assets, which can be used for other purposes.
  • Clean Break: There’s no ongoing ownership relationship between the seller and the buyer (although there might be transitional arrangements).
  • Focus on Core Business: The seller can potentially focus on its core business after selling off a non-core asset or division.

Cons:

  • Loss of Asset/Revenue: The seller loses the future revenue and profits generated by the assets.
  • Potential Competition: The Black-owned entity could become a competitor.
  • Finding a Suitable Buyer: Identifying a Black-owned entity with the capacity to acquire and operate the assets can be challenging.
  • Valuation Disputes: Disagreements over the fair market value of the assets can arise.
  • Complexity: Asset sales can be complex, involving legal, tax, and operational considerations.
  • Ongoing measurement: To prove that real value has been transferred, the relative values of both the original/remaining business and the asset that was sold to BEE partners must be proven for several years after the deal. This incurs cost and is also a major risk in that the new owners could face unfavourable trading conditions (or simply run it into the ground) and then ‘Net value’ hasn’t been achieved and the original business would have done all of this and still not be empowered.

Costs

  • Setup Costs:
    • Legal fees (asset sale and purchase agreement).
    • Valuation fees.
    • Due diligence costs.
  • Ongoing Costs:
    • Limited ongoing costs specific to the B-BBEE transaction itself, but the selling entity will have costs associated with its remaining business and the annual re-evaluation of the transaction itself.

Gotchas

  • Non-Productive Assets: Selling assets that are not genuinely productive will not be recognized for B-BBEE purposes.
  • Unsustainable Business: Creating a Black-owned entity that is not sustainable is not in the spirit of B-BBEE.
  • Fronting: Using the sale of assets to create a false impression of Black ownership.
  • Valuation: Under-valuing the assets to reduce the price paid by the Black-owned entity.
  • Net Value: Failure to create sufficient value in the hands of the black acquirer – measured over at least 3 years post the deal.

Grey Areas

  • Defining “Sustainable Business”: The Codes require the creation of a “sustainable business,” but the precise definition can be subjective.
  • Valuation: Determining fair market value can be challenging, especially for unique or specialized assets.

Alternatives

  • Direct Ownership (Share Sale)
  • Broad-Based Ownership Schemes (BBOS)
  • Employee Share Ownership Programmes (ESOPs)
  • Trusts
  • Private Equity Funds
  • Equity Equivalents (for multinationals)
  • Options and Warrants.
  • Preference Shares.

This provides a comprehensive overview of the Sale of Assets as a B-BBEE ownership method. It’s a viable option for companies that have identifiable, productive assets they are willing to sell to create Black-owned businesses, and that can accept the risk of ongoing measurement/net value calcs from an asset that’s no longer under their control.

For many companies, a better structure can be achieved using the private equity rules. Please contact us for a confidential discussion around your unique requirements.

Chapter: Ownership methods
Chapter: Ownership methods
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