The decision to do a BEE ownership deal is primarily an investment decision (we cover the emotional elements in other articles, but the point here is that if it doesn’t make financial sense then don’t go further unless you’re feeling particularly charitable, so cross this bridge first).
You need to understand, at the outset, whether you can expect a return on your investment. If the returns are not worth the time and money spent then don’t do a deal. Simple. If the returns are greater than the costs then seriously consider a deal.
No matter which way you do a deal, there are always both upfront costs and ongoing costs that you will need to understand in detail because they differ substantially between different ways of doing BEE ownership. But before we get into a costs discussion, you must be able to answer whether BEE ownership itself will add any value to your business.
BEE ownership is worth the investment of your time and money to get right if:
(a) it will prevent your existing customers leaving you resulting in a loss of sales and/or destruction of business value, or
(b) it will increase sales and/or increase business value.
I.E. there are two metrics to consider: sales (filtering down to profits) and business value. They’re different and both will help you make a go/no-go decision.
BEE ownership impact on Sales/profits:
What happens to your business without BEE ownership? You’ve probably already felt pressure from clients do improve your scorecard, particularly ownership. You can only expect this to increase. If you carried on without a BEE deal, how much sales would you lose? 10%, 20%, 50%, 100%?
For most of our clients, that answer is what drives a deal. Because the numbers are substantial. And losing sales is tough because your cost structure is built around your current/expected sales levels. So when you lose a client, you have less income but the same costs. Your profits get hammered disproportionately. Once you’ve lost a client you have to reduce costs, quickly. That means cutting back on key business value drivers, like R&D, marketing and of course people. It’s a world of pain but if you lose enough sales and don’t act you lose the business entirely. Often it only takes a 10% drop in sales to kill a business if it can’t cut costs. And often your bigger clients are more than 10% each. They all face the same pressure on their procurements scorecards for you to be black owned. 51% black-owned.
- If a BEE ownership deal would prevent you losing >R250K pa then contact us. We have a no-brainer deal for you.
On the other hand, what happens if you could increase sales by doing a BEE ownership deal?
Increasing sales goes almost straight to the bottom line (unless the deal is so big you have to increase your cost base to service it, but hey, that’s a good problem to have). What new clients could you get? which clients could you get back? How much share of wallet could you get with existing clients? Could you expand your product line? Do this analysis.
- If a BEE ownership deal would increase your profits by >R250K pa then contact us. We have a no-brainer deal for you.
If would would prevent a loss and increase profits by >R250K each, then you’re already up. This is the reality for almost every business. Why would yours be different?
BEE ownership impact on Business value:
Another way to think of the BEE investment decision is in terms of business value. This is a bit more complex (so we hope the simple sales numbers have got you to seriously consider a deal already).
There are many ways to value a business. But the core concept is that a business is worth either (a) what someone will pay for it (if you’re selling) or (b) the present value of the future cashflows of the business, discounted for risk (if you’re not selling). Sometimes the values are the same. Either way – if the sales go up because of a BEE deal then your value goes up. If the risk comes down because of a BEE deal then your value goes up because your future earnings are more likely, more predictable and therefore more valuable. The value of your business is very sensitive to how fast it grows, and how much risk it carries. Ask your accountant to build a model for you if you don’t already have one. A slight improvement in sales, or a slight reduction in risk can make a very large difference to how much your business is worth to you, or a potential buyer.
- Here’s the magic number: if a BEE ownership deal would prevent the loss of value of 10% of the your business, or increase its value by 10%+ then contact us. We have a no-brainer deal for you.
For most businesses operating in South Africa this is entirely intuitive. A 51% BEE-owned business faces a very different future earnings and risk profile to one that’s white owned. That’s just reality.
What if I want to sell my business?
There are many ways to do BEE ownership deals. In some of them, when you want to sell your business, your black shareholders will sell too. That leaves you selling a ‘white’ business. Probably not worth nearly as much as it could be. Any buyer would discount the price they pay because they know that they’ll have to do a BEE-deal in future. And even if the buyer is black, they will certainly use this power to get a lift in value for them post deal…at your expense.
But what if when you wanted to sell your business, you could sell it to someone else (of any colour or nationality) and it would remain black-owned? Yes, that’s possible. In this case, you’d be selling a company in South Africa that is 51% black and this has to be worth a whole lot more than if you tried to sell the same business but it was white.
If you do the numbers, then what you’ll most likely find is that your business if far more valuable if you can sell it with the ‘BEE hunting license’ than without. And if that number is R500K or more higher, then please contact us. We have a no-brainer deal for you.
What about access to capital?
Government is supporting 51% black owned businesses with cheaper capital for growth. Big banks have incentives to lend money to black business at a discount to the price they offer white businesses. Chances are, if you’re looking for investment then making your business 51% black owned will open up more doors and reduce your cost of capital. A lower cost of capital increases your valuation too.
Your real value lift from BEE ownership is a great combination of return on investment:
When you’ve done your numbers, you’ll almost certainly find that 51% BEE ownership will:
- Prevent the loss of sales of at least R250K pa
- Open opportunities to grow sales by at least R250K pa
- Decrease risk or increase sales so that the value of your cashflows to you (or someone else) is at least 10% more.
- Open up capital markets to more than the ‘white’ only players.
- Increase the price that someone is willing to pay for your business when you sell it by at least 10% or R500K.
If the numbers make sense, and when you’re ready to chat through all the other issues relating to deals, then please contact us. We have a no-brainer deal for you.
Worried about control? There are misconceptions we should clear up.
