What should businesses look for in prospective BEE partners?
Where would one start looking for potential BEE partners and what are the advantages and disadvantages of going this route?
Broad-Based Black Economic Empowerment is not only about ownership. Ownership is worth 20 points on the generic scorecard (for companies with an annual turnover of more than R35 million) and 25 points for QSEs – qualifying small enterprises with an annual turnover of between R5million and R35 million.
There are many advantages of having a black partner, and many pitfalls.
When looking for a black partner you should take into account the potential points you can earn – there is no point in trying to become BEE compliant and discovering that you have earned zero or few points:
- The partner must be a black SA citizen (African black/Indian or coloured person). If the partner is a company its owners must be black.
- The target is 25% plus one vote of your share capital. Black women should hold at least 10% of the shares. It is a good idea to involve a broad-based scheme in some of the ownership of the company.
- The new shareholders should have VOTING RIGHTS on the shares they own – in terms of the articles of association of the company.
- The new shareholders should have ECONOMIC INTEREST in the shares – the right to receive dividends or proceeds from the business. This does not preclude you from selling shares to your partner and expecting him to pay for those shares from dividends received.
The ideal/only partner is one who will add value to your business, either by investing and helping capitalise it better, or in an operational way to increase profits. If the partner is prepared to operate/work in the business as a director so much the better and you will earn extra points via the management element of the BEE scorecard. Bear in mind that a director has various fiduciary duties towards the company, so your partner must be prepared to take on those duties, including possibly signing surety on behalf of the business.
Advantages of a BEE partner:
- Many companies, being your customers, wrongly associate BEE only with black ownership. Nevertheless if you have black ownership they may be happier dealing with you. Either way it will help empower your business and earn points.
- Government and other agencies put a lot of emphasis on owners. If the business does business with government or public entities then ownership issues will crop up. The partner will be able to open doors to your business that may be closed: Government, public enterprises or local authorities.
- The partner may have a different perspective on the business and may be able to find new markets. Is their value to selling your products and services to black communities or making headway into for example Soweto? The buying power of Soweto residents is increasing. New shopping centres are being built and the economy of “black” areas is growing. There is a growing emerging black middle class.
- A business that is more than 25% black owned can be regard as a category B enterprise development beneficiary This means that the business can qualify for enterprise development contributions from other companies wishing to increase their BEE scores.
Disadvantages of a BEE partner
- As in any partnership the parties may not get on well.
- The partner will have to find finance to purchase your shares. In many cases he will not be successful.
How to look for a suitable BEE partner.
The rules are the same as looking for any partner: He could be an employee a supplier, customer or competitor, or have some existing relationship with you.
He should have some of the skills you need in the business.
Financing the deal
This is one of the most controversial aspect of taking on a partner. It IS expected that the partner will pay for his shares. The business must be valued by an independent agency, e.g. accountant/auditor. “The owner will always overvalue it and the purchase will undervalue it.”
Financing options are available to help the new partner. Often he will have no surety which makes it more difficult to arrange finance. Business Partners, IDC, and the banks have various empowerment funds to arrange finance. If the new partner cannot offer surety, then the above agencies may require the business to assume extra risk in the transaction – in the form of taking on extra liabilities or assuming some sureties to safeguard the banks’ money.
The business can also agree to do self-financing. It can lend the money to the partner and get re-paid via dividends paid to the shareholders.
Points to Beware of:
The company should set up a shareholder’s agreement with the new partner. Included in the agreement should be clauses ensuring that the new partner may not sell his shares within a certain period, and ensuring that if he does he re-sells it to another BEE partner. There have been many instances where a BEE partner has sold his shares, therefore depriving the company of their BEE partner and losing them BEE points.
If a company does choose to self-finance the deal, or stand surety on the basis that dividends will be paid to repay the debt, it must ensure that good business practice prevails and it can pay dividends. There is no point in selling shares on the basis that the new owner will earn dividends if no dividends are forthcoming.
The national credit act even applies here. You may allow someone to assume a big debt if they do not have the means to repay the debt.
A BEE partnership deal can make a lot of business sense, but it must be set up carefully. There are other ways for small businesses to become compliant but a BEE ownership deal can have greater benefits for the business.