A practical guide to measuring the ROI of BEE ownership
Introduction:
BEE ownership is often seen as a cost of doing business in South Africa. But what if it could be a source of competitive advantage and increased shareholder value? Many businesses struggle to quantify the true return on investment (ROI) of BEE, viewing it primarily as a compliance exercise. This article demonstrates that a well-structured BEE deal can generate a positive ROI, both in terms of short-term profitability and long-term value creation. We provide a framework applicable to both small businesses (EMEs/QSEs) and large multinational corporations, helping you unlock the real value of BEE. This article will walk through the strategic case, the ROI calculation (both profitability and valuation), and key structuring considerations. Note that since every business is unique, this is intended as a guide only.
Part 1: The Strategic Case for BEE Ownership (High-Level)
BEE is more than just ticking boxes; it’s about aligning with South Africa’s economic transformation goals and building a more inclusive economy. Genuine BEE participation offers substantial strategic benefits:
- Beyond Compliance: A strong BEE profile enhances brand image, fosters customer loyalty, and improves employee engagement. It signals a commitment to South Africa’s future.
- Accessing New Markets: BEE compliance unlocks opportunities like government contracts, preferential procurement, and partnerships with other BEE-compliant businesses. This “BEE hunting license” is a powerful advantage. In certain sectors, a minimum BEE level is mandatory for operating licenses.
- Social Impact: BEE contributes to a more equitable society, fostering goodwill and long-term sustainability.
The Competitive Advantage:
Let’s use Porter’s Five Forces to see how BEE ownership can strengthen a company’s position:
- Bargaining Power of Suppliers: Preferential procurement policies can improve terms and access to key suppliers.
- Bargaining Power of Buyers: Government and BEE-conscious customers become more accessible and potentially more loyal.
- Threat of New Entrants: Strong BEE credentials create a barrier to entry for competitors lacking similar transformation commitments.
- Threat of Substitute Products or Services: Differentiation through BEE can make your offerings more appealing in a competitive market.
- Rivalry Among Existing Competitors: A superior BEE profile becomes a key differentiator, potentially leading to market share gains.
Part 2: Calculating the ROI of BEE Ownership (Detailed)
We’ll analyze ROI from two perspectives: short-term profitability and long-term value creation.
Scenario Setup:
We’ll use two hypothetical examples:
- Example 1: “TechStart” (EME/QSE): A small software development company with annual revenue of R5 million.
- Example 2: “GlobalCorp” (Multinational): A large manufacturing company with annual revenue of R1 billion.
For both, we’ll compare a “Without BEE” and “With BEE” scenario. Key assumptions are stated upfront (and will be revisited in a sensitivity analysis).
Assumptions (Simplified for illustration – real-world scenarios require detailed analysis):
| Metric | TechStart (Without BEE) | TechStart (With BEE) | GlobalCorp (Without BEE) | GlobalCorp (With BEE) |
|---|---|---|---|---|
| Revenue | R5,000,000 | R5,000,000 + X | R1,000,000,000 | R1,000,000,000 + Y |
| Cost of Goods Sold | R2,000,000 | R2,000,000 | R400,000,000 | R400,000,000 |
| Operating Expenses | R1,500,000 | R1,500,000 | R300,000,000 | R300,000,000 |
| BEE Transaction Costs | – | R100,000 | – | R5,000,000 |
| BEE Admin Costs | – | R20,000/year | – | R500,000/year |
| BEE Financing Costs | – | R50,000/year (Dividends) | – | R25,000,000/year (Dividends) |
| Lost Revenue (Without BEE) | R500,000 | – | R100,000,000 | – |
| Increased Revenue (With BEE) | – | R1,000,000 | – | R200,000,000 |
| Discount Rate (DCF) | 15% | 15% | 10% | 10% |
| Exit Multiple (EBITDA) | 5x | 6x | 8x | 9x |
Cost Analysis:
- “Without BEE”:
- Lost Revenue: TechStart loses R500,000 in potential contracts due to non-compliance. GlobalCorp loses R100 million. Estimation Methodology: (Probability of winning contract) * (Value of contract) * (BEE score impact). For example, if TechStart had a 30% chance of winning a R2 million contract, and BEE compliance would increase that chance to 80%, the lost revenue is (0.8-0.3) * R2,000,000 = R1,000,000.
- Lost Opportunities: This is harder to quantify, but represents future revenue streams foregone due to a weaker competitive position.
- “With BEE”:
- Transaction Costs: One-off costs for legal, due diligence, and structuring.
- Financing Costs: Dividends paid to the BEE partner (representing the cost of equity in a vendor-financed deal).
- Administration Costs: Ongoing compliance and reporting expenses.
- Dilution: Existing shareholders experience a reduction in ownership percentage.
Revenue Analysis:
- “Without BEE”: Baseline revenue reflects the current market position.
- “With BEE”:
- Increased Revenue: Access to new markets (government contracts, etc.) and potentially improved pricing power. TechStart gains R1,000,000 in new revenue, GlobalCorp gains R200,000,000. Estimation: Similar probability-weighted approach as lost revenue.
- “BEE Hunting License”: Examples: access to government tenders, preferred supplier status with large corporates, joint ventures with BEE partners.
Profitability Analysis:
| Metric | TechStart (Without BEE) | TechStart (With BEE) | GlobalCorp (Without BEE) | GlobalCorp (With BEE) |
|---|---|---|---|---|
| Revenue | R5,000,000 | R6,000,000 | R1,000,000,000 | R1,200,000,000 |
| Cost of Goods Sold | R2,000,000 | R2,000,000 | R400,000,000 | R400,000,000 |
| Operating Expenses | R1,500,000 | R1,500,000 | R300,000,000 | R300,000,000 |
| Lost Revenue | R500,000 | – | R100,000,000 | – |
| BEE Transaction Costs | – | R100,000 | – | R5,000,000 |
| BEE Admin Costs | – | R20,000 | – | R500,000 |
| BEE Financing Costs | – | R50,000 | R25,000,000 | |
| EBITDA | R1,000,000 | R2,330,000 | R200,000,000 | R469,500,000 |
| Incremental EBITDA | – | R1,330,000 | – | R269,500,000 |
| Simple ROI (Year 1) | – | (1,330,000 / 170,000) = 782% | – | (269,500,000 / 30,500,000) = 884% |
Valuation Analysis:
- Discounted Cash Flow (DCF): Projecting future cash flows (using the profitability analysis) and discounting them back to present value using the discount rate. The difference in NPV between “Without BEE” and “With BEE” represents the value created. (Detailed DCF calculations are omitted for brevity but would be included in a full analysis).
- Exit Multiple: A simplified valuation method. A BEE-compliant business may command a higher multiple.
| Metric | TechStart (Without BEE) | TechStart (With BEE) | GlobalCorp (Without BEE) | GlobalCorp (With BEE) |
|---|---|---|---|---|
| EBITDA | R1,000,000 | R2,330,000 | R200,000,000 | R469,500,000 |
| Exit Multiple | 5x | 6x | 8x | 9x |
| Valuation | R5,000,000 | R13,980,000 | R1,600,000,000 | R4,225,500,000 |
| Value Increase | – | R8,980,000 | – | R2,625,500,000 |
Sensitivity Analysis:
The above calculations are based on assumptions. They are intended as a guide only. In your own analysis, you must test how sensitive the ROI is to changes in these assumptions. For example:
- Lost/Increased Revenue: What if the lost revenue “Without BEE” is higher or lower? What if the increased revenue “With BEE” is less than projected?
- Discount Rate: How does a higher or lower discount rate affect the DCF valuation?
- Exit Multiple: What if the exit multiple is not as high as expected?
Doing this analysis on your own business can help determine the robustness (or fragility) of the investment case.
Comparing BEE Ownership ROI to Other BEE Scorecard Elements:
While ownership may appear more expensive per point initially, its long-term strategic benefits (higher revenue, increased valuation) often outweigh the costs, leading to a higher overall ROI. This is especially true if the ownership deal is well-structured and the BEE partner adds strategic value.
Part 3: Structuring a Value-Creating BEE Deal (Practical)
- Choosing the Right Partner: Seek partners with industry expertise, networks, and a genuine commitment to transformation, not just a “rent-a-black-face” approach.
- Deal Structure: Consider equity sales, options, or trusts. Align the structure with your long-term goals.
- Financing: Explore vendor financing, external debt, or private equity.
- Legal and Tax: Get expert advice to ensure compliance and optimize the deal.
- Ongoing Management: Actively manage the partnership to ensure it delivers on its objectives.
EME/QSE Specific Considerations:
- Smaller businesses face resource constraints. Simplified deal structures and financing options are crucial.
- Partnering with larger businesses can provide mentorship and support.
Large Corporate Specific Considerations:
- Complexities include shareholder approvals, regulatory compliance, and international tax implications.
Conclusion:
BEE ownership, when approached strategically, is an investment that can generate a significant positive ROI, not merely a cost. By carefully analyzing costs, projecting revenue gains, and considering both profitability and valuation impacts, businesses of all sizes can unlock the true value of BEE.
Don’t just comply – compete with BEE. Assess your situation, seek expert advice, and explore how BEE ownership can contribute to your long-term success.
Please contact us to discuss your business and how BEE ownership can improve its revenues, cash-flows, and valuation.