Is BEE about transformation? compliance? or could it be an investment that sets up a sustainable competitive for your business?
The lens you use to frame the problem is paramount to choosing the appropriate outcome and deciding if it’s worth the effort.
When it comes to transformation, most business owners we speak to understand the need to look after their black staff, suppliers and customers in some form. They understand the need to help transform our country. Many are happy with the transfer of a minority stake in the business (over time) to achieve this. There is a strong sense of looking after the stakeholders in the business as the ‘circle of influence’ and it’s a contribution that many are prepared to make, but it’s a minority stake and closely aligned to normal (i.e. non-BEE) employee shareholder scheme levels of ownership.
Those with a ‘compliance’ lens tend to spend just enough money on the scorecard to remain compliant. If they do any ownership, it’s a reluctant 25.1% deal, often using modified flow through. They’re compliant, but not aspirational nor strategic about BEE. They want the cheapest deal that gets them compliant and never give up control.
Those looking at BEE strategically – as an investment decision that can bring competitive advantage – quickly realise:
- BEE is driven by your customers, not the government. Chances are your customers want their suppliers to be 51% owned to get the most points on their scorecard.
- BEE is zero sum: either you do it or your competitors do. It’s a choice that creates winners and losers from within the same pot of money. It’s redistributive by design.
- Ownership is the cheapest form of BEE – it enables EME/QSEs to get level 1 or 2 without spending on the rest of the scorecard, and for Generic companies (who must spend on all elements) ownership is the only way to get to the higher BEE levels.
- It’s an investment decision: it’s much easier to transfer 51% or more of the business if you know you’ll make more money as a result.
- It’s a control decision: astute business owners understand that control of investment decisions and the board is different to managerial control. Effective day to control can be maintained while transferring majority ownership, and negative control can be maintained on major board-level decisions.
- There are variety of options/structures that can achieve this in different ways – they carry different costs and different risks. They must be assessed in terms of BEE compliance (letter and spirit of the Act), tax consequences (now and down the line), control, ROI etc. It’s a marriage, after all.
The most fundamental analysis, indeed the starting point, should always be working out what value BEE brings:
So how do you do it?
Business valuation is about future earnings, discounted to today by the expected risk.
Doing a BEE deal should ideally increase earnings potential and reduce risk. Not doing a BEE deal may reduce earnings potential and increase risk (as is the situation many of our potential customers find themselves in). Remember than in business valuation terms, even a small change in sales growth rates or a small reduction in risk (cost of capital) can make a major change to your valuation.
So how do we analyse the future earnings side?
Here is guide as to how to do it so that you can make more confident decisions:
- Draw up a list of all your existing clients and prospective clients.
- For each of them, make a column for existing and potential future products/services that you could sell to them.
- For each of these, estimate how much you will sell to them if you do nothing, and how more you could sell to them at 25,1%, 51% or even 100% BEE ownership.
- Do this for year 1, year 2, and all the way out to year 5. It gets fuzzy out there but force your mind to interrogate what is realistic.
- Put a confidence level against each number – how certain are you to achieve these numbers
- Sum the (totals*confidence) for each year. You now have a rough idea across 4 different ownership scenarios.
- That’s the internal analysis. It’s a guess at best but forces you to think.
You now need to do the hard part: speaking to your customers.
Repeat the same exercise as above, but actually meet with your customers.
- Have a confidential discussion with them.
- Explain how you want to solve their problem (BEE procurement from quality customers they trust).
- Ask them, if you got 25,1%, 51%, 100% BEE ownership levels then how much more business you would get?
- Ask them to put a confidence level against their statement above i.e. force them to really think
- Ask them what else (i.e. factors aside from BEE) you need to do to get more business. This is really important – it may be that you actually suck on service/price/quality but you think you’re not getting the work because of BEE. Or it may be you’re really good and it’s only BEE holding you back. Either way you learn and can improve.
- Ask what happens if you do nothing about BEE – would your business really suffer?
- by when?
- Ask who else supplies them and what BEE level they have (they may not tell you exactly, but you’ll get a sense of how competitive it would make your business).
- Maybe you can’t get much more business but they’ll offer you much more attractive payment terms? You need to push them and understand the difference here too. An extra 30 days cash can make a major difference to a business, and it’s often a concession they’re willing to make to BEE suppliers.
- See how much you can get at different levels of BEE.
- You also need to understand if their contracts with have any clauses relating to a change of ownership in your business. Many large, “strategic” contracts do have provisions for change of ownership – normally to do with takeover provisions – and you’ll want to understand if BEE ownership triggers any of this. It’s a potential business risk that your customers may not even be aware they’re forcing on you.
- Repeat this with each customer. Maybe even different people from each customer, it depends how complex their business is, and how important they are to you. These conversations are great for building relationships, demonstrating intent, and growing your business so it’s never time wasted.
- Add it all up as before.
Now you’ve got their guesses and somewhere between theirs and yours is the answer as to how much more your business could grow sales at different levels of BEE; from doing nothing to going 100% in. You’ll also know what other levers you can pull to grow your business.
You are now in a position to strategically choose the right level of BEE.
Lastly, remember that a small increase in sales or reduction in risk can make a massive difference to your valuation. You may find that a 51% deal is way more affordable than you think.
We have a very elegant solution to this complex problem where we can demonstrate how much your value can be expected to grow while you legitimately contribute to the future of SA. For help on how best to achieve that level, speak to us.