Why do a BEE ownership deal?

There are 2 reasons to do a BEE ownership deal:

  • To contribute towards making South Africa a more stable, racially inclusive economy.
  • To grow your South African business (the reason most BEE deals are really done).

So how does a BEE deal help you grow?

As a recap, the BEE Act is effectively a set of government policies aimed at transforming the economy. The Act sets targets (scorecards) for black participation in ownership, management, skills development, supplier development and more. Companies need to measure and report on their level of achievement against the scorecard agreed to for their industry. In this way government can see the efforts and results of BEE.

The SA government uses its immense spending power (±R800 Billion p.a.) to effect this change – by incentivising its’ suppliers to be BEE. Tenders responses are typically scored out of 100 points, of which either 10 or 20 are based on BEE score with the balance coming from fundamentals (e.g. the ability to deliver the work and the price proposed).

Unless you are supplying highly scarce and unique resources in a non-competitive environment, it’s highly likely that your ability to win a juicy government contract depends on the competitiveness of your BEE score.

The effect of this is that if you want to supply government – the biggest customer in the country – then you need to be able to compete on price, quality and BEE score.

Many companies don’t directly supply government, so why do they need to worry about their BEE scores?

Trickle-down economics and BEE scores

The answer is in trickle-down economics: Government mostly does business with big companies. Big companies are supplied by medium companies who are supplied by small companies. You get the picture – business trickles down.

BEE scores trickle down too, but in a more severe way: the scorecard of a supplier (Company A) to government depends to a degree of the who supplies Company A…and for Company A to get the best BEE points so that it can compete with others for government work, its’ suppliers must have the highest possible BEE score.

51% ownership through a proper structure:

The net effect of this: whereas the target BEE ownership score for your industry may be 25,1% your customer may demand that their suppliers (i.e. you) have ownership scores of 51% because that’s what they need to be competitive. If you don’t then no deal. If not now, then later. If you still think that 25,1% ownership is enough then we have a bridge to sell you…

Further, the nature of the ownership is important and increasingly scrutinised.

We know that big suppliers to government (e.g. SASOL) not only demand 51% BEE ownership from their suppliers but also interrogate the structure by which this is achieved to make sure that it’s not ‘soft’ – i.e. that it will withstand scrutiny by a verification agency and meet the requirements to comply with both letter and spirit of the BEE act.

To grow in South Africa, shrink, or go offshore?

As BEE trickles down (at least 25% of the biggest 20K companies in SA are already 51% black-owned) the pressure mounts.

The choice becomes:

  • Get your BEE ownership sorted out and grow your South African business ahead of your competition.
  • Compete with other ‘white’ businesses for an ever-declining market in South Africa.
  • Go offshore – with all the risks and costs (always underestimated) that this entails.

What we do know is that BEE isn’t going away; that with Zuma out the way and corruption under scrutiny less of the R800 Billion spent by the SA govt will be wasted in future; that ownership is increasingly emphasised above other scorecard measures…and that transferring a minority (or controlling) interest in privately-held companies remains massively challenging on technical, financial and emotional levels.

That’s the why. What about the how?

Black unicorns or Vendor-finance:

If your business is growing fast enough (30% pa plus) to afford their cost of capital, and if you can find one, then maybe a “black unicorn” will emerge from the fog and guide your business to the hallowed lands of level 2. Most companies have no such luck and resort to vendor-financing the purchase of their shares by a BEE counter-party. (For those that haven’t yet experienced this pain, it means you – the seller – lends money to the BEE shareholder so they can buy your shares, which they repay via dividend flow).

Our models show that these deals almost always destroy shareholder value.

The Tusker alternative:

If you are considering a BEE ownership deal, or are unhappy with your existing deal, or are a black shareholder wanting to sell your interest in a privately-held company then we’re ready to help.

Tusker offers:

  • Value creation through governance and growth.
  • Long-term BEE ownership deals from 25% to 51% and/or
  • Significant diversification of shareholder risk.
  • A fair price and a highly standardised deal that’s quick to execute.
  • Structures where you retain effective control.

Please visit Tusker.co.za and complete the contact form – one of our Directors will call you back.