This guide will help you understand what a BEE partnership entails and how to go about ensuring that it works for your business.
Black economic empowerment (BEE) is part of the South African business landscape, and companies are encouraged to embrace it. If properly set up, it can make a lot of business sense. However, many business owners have little idea of where to start when it comes to finding a BEE partner.
What to look for in a BEE partner
- The partner must be a black South African 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’s a good idea to involve a broad-based scheme in some of the ownership of the company.
- The new shareholders should have voting rights in terms of the articles of association of the company.
- The new shareholders should have economic interest in the shares, giving them the right to receive dividends from the business. This does not preclude you from selling shares to your partner and expecting them to pay for those shares from dividends received.
Partnerships that work
There have been numerous BEE partnership disaster stories in the media, which has led to some cynicism. The fact is that a BEE partnership is like a marriage.
It’s vital to go into partnership with a company or group that you trust, and with whom you share similar objectives, values and ethics. You also need to believe that they will add value to your company.
Without this level of alignment between your business and your BEE partner, the relationship may well fail. That’s why it’s best to find partners that have been recommended to you or who you know of through other channels. That will help to put your concerns to rest before negotiations have even begun.
Once you have identified a BEE partner, most banks will help in raising capital to fund the transaction, as well as assisting in structuring the terms and conditions, along with accounting and legal firms.
There are many independent BEE consultants who are specially trained to look into the dynamics of the transaction, empowerment ratings and compliance, as well as provide recommendations on what strategies to pursue.
The best advice on becoming empowered is to be well informed, have the right skills and ensure that it’s a value-adding transaction for your business.
Where and how to find a BEE partner
Finding a BEE partner is not easy and there are no simple solutions. Much depends on the business and personal dynamics of the parties involved. The best way to start looking is to network.
Identify which staff members, vendors, partners and other companies, even competitors, could bring value to your company. Talk to banks, local business organisations, chambers of commerce, and people in municipalities, political parties and trade unions.
These organisations are most likely to be able to point you in the right direction and identify potential partners they think will be best suited to work with you.
Financing BEE deals
Note that the BEE partner is expected to pay for their shares. Therefore, the business must be valued by an independent accountant or auditor to establish its true value.
Financing options are available to help the new partner and a number of methods exist for financing BEE deals. State funding may be obtained from the Industrial Development Corporation (IDC), which has an approach to funding BEE deals similar to private-equity financiers.
The organisation will therefore play a constant and active role in the businesses it finances. The National Empowerment Fund (NEF) is another public financing mechanism that has access to BEE capital. The NEF provides expansion and acquisition capital to black-owned and managed enterprises, black entrepreneurs buying equity shares in established white-owned enterprises, project finance, and BEE businesses that are or wish to be listed on the JSE.
BEE transactions can be privately financed through a number of mechanisms. These include debt finance and project finance, asset securitisation, debt with equity, convertible debt or convertible debentures and preference shares. If the partner has no surety, it will be more difficult to arrange finance.
Financiers 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 bank or funder’s money. The business can also agree to do self-financing – you can lend the money to the partner and get re-paid via dividends paid to the shareholders.
Be sure to draw up a shareholder’s agreement with the new partner. Include clauses in the agreement to ensure that the new partner cannot sell their shares within a certain period, and that if they do, they re-sell to another BEE partner.
There have been several cases where a BEE partner has sold their shares to a non-BEE partner, therefore depriving the company of their BEE status and losing it points on the scorecard.
If your company does choose to self-finance the deal or stand surety on the basis that dividends will be paid to repay the debt, you must ensure that good business practice prevails and that you 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. Also, you may not allow someone to assume a big debt if they do not have the means to repay it.
During the course of running and growing your business, you will need access to both short-term and long-term cash savings to pay salaries, suppliers, or even to save for a future project or large payment. Standard Bank provides a range of flexible Savings and Investment solutions, with competitive interest rates, to help you meet your business’s savings and investment needs.
The Department of Trade and Industry, www.dti.gov.za