20 Jan

BBBEE: Can it work? - COETSA Part 2

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This blog forms part of our Convention for the Economic Transformation of South Africa (COETSA) series where we look at various initiatives that are designed to transform our economy.

 

The BBBEE codes were introduced for the purposes of rectifying the economic injustices of the past. Through these codes it was hoped to reduce the huge economic gap between the poor and the rich; the poor being mostly historically disadvantaged. The time has come for us to ask the all-important question: has BBBEE achieved its purpose? 

 

In my view it has not. While the principle is sound the execution has been troublesome. All that it effectively has done is enrich a few elite who use their connections as a base for doing transactions with the rich get richer and the poor stay poor. 

 

In this blog post I would like to focus on the ownership element of BBBEE. Businesses should want to actively get involved in BBBEE but it needs to make financial sense. There is always a resistance to doing something if you’re forced to do so. How do you make it attractive for entrepreneurs to do a BBBEE deal? 

 

First of all there should be a database of previously disadvantaged controlled business that want to expand their operation by entering into a BBBEE deal. The database should be concise and have enough information to be able to make an initial assessment.  A business that wants to enter into a BBBEE deal will similarly place their particulars on the same database.  Therefore both parties can make an initial assessment through the database before communicating with each other. A “matching” service if you will.

 

Through corporate advisors, negotiations can commence. To try to do a sale on your own would not be wise if it’s not your area of expertise. Many negotiations have failed due to miscommunication. A corporate advisor is an expert in this field and will negotiate the best possible outcome for both parties. Choosing the right business partner is crucial to the success of the transaction. Refer to our blog dated 2 April 2014 with regard to business partners.

 

The sale of a percentage of a company to a BBBEE company must be done on a fair value basis. The amount of business that the BBBEE partner will bring to the company should be factored into that fair value. What’s important, there MUST be an exchange of cash for the shares sold. It cannot be done purely on the amount of business that the BBBEE partner will generate. If a portion of the sale is done on a basis of bringing in new business, this value must be quantified in the contract and clearly stipulated what happens if the additional business does not take place.

 

If the BBBEE partner does not have the cash to do the transaction the new partner can seek government institutions, such as the IDC and the NEF, for funding of the acquisition. There are huge amounts of resources to facilitate this type of transaction. Furthermore, there are a number of angel investors that could provide the finance. 

 

In conclusion, for a BBBEE transaction to work, all parties must exercise good faith. We believe if you apply the above principles, a BBBEE transaction can and will work.

 

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