BEE Partner, South Africa Economy Watch

Deciding which entity to develop

In most instances, the business probably has most expertise in its own operational field. Ideally, the business should look to share this knowledge with Black business by contributing to an enterprise development beneficiary in the same field. In many circumstances, it makes no sense to share knowledge and operational capacity with a potential competitor. Before making a judgement on this comment, consider whether the beneficiary is actually a competitor or another business of similar nature servicing a different market.

Enterprise development should be seen as an opportunity for current businesses to gain access to new markets by investing in Black-owned businesses that already have a foothold in the desired market. The enterprise development beneficiaries do not have to be 100% Black owned. A window of opportunity is open for the contributor to take a 49% equity interest in the Black-owned beneficiary.

Integrated enterprise development is more likely to be a sustainable venture. The measured entity provides start-up capital to the beneficiary and potentially offers operational capacity through the sharing of expertise. Apart from giving capital and operational support, the measured entity can help sustain the beneficiary’s cash flow by procuring from the beneficiary. The measured entity would score points for the financial investment in the beneficiary, as well as the time of employees deployed to assist the beneficiary.

Enterprise development may come as operational or financial assistance in the form of a grant, loan or straight equity investment. If it is restricted to financial development, then there is no need to restrict the investment to the measured entity’s area of expertise.

The crux of enterprise development is the spirit in which it is done. Fortunately, this cannot be measured because verification agencies would then face impossible (and possibly innovative) manipulation by measured entities. If a measured entity brings a deal to a beneficiary that helps sustain the business of the beneficiary, the value of that deal cannot be measured and is not taken into account on the scorecard. However, because it was done in the spirit of BEE, the satisfaction this brings cannot be totally negated.

The measured entity may wish to have this kind of act included in the verification agency’s rating report — not the certificate, but the report (assuming they provide one). While it does not count for actual BEE points, it may help the business secure a closely contested public sector contract.

Statement 600 should be used to assist in the creation of Black businesses in line with the value chain required by the measured entity.

The strategic implementation of enterprise development has unlimited potential for a company when it is approached with a broad perspective and not just a BEE compliance attitude. The development of Black business is a nursery for future employees, suppliers, sales agents and clients.

Measured entities should refrain from using a paternalistic approach to enterprise development beneficiaries.

Memorandum of understanding

A common problem with enterprise development initiatives is not establishing the terms and objectives of the contributor’s participation. The enterprise development relationship should be symbiotic, and not one of “master and servant”. Both entities should nurture the relationship. White parties often take a paternalistic attitude in their relationship with enterprise development beneficiaries. It is a common cause of great animosity between parties who are working towards a common goal and should be avoided.

The best way to avoid complications is to set out the scope of involvement of the contributor to the beneficiary in a memorandum of understanding (MOU) before the contract is entered into. The MOU will also cover how the parties will engage with each other, for example, through board meetings, management meetings or shareholders meetings, on a formal or informal basis.

The MOU should also include performance criteria to measure the progress of the business against preset milestones. The performance criteria may determine the scope of the contributor’s participation in the active management of the business.

The MOU should contain guidance on those areas where the beneficiary would like assistance to prevent the contributor offering help in unwanted areas. The MOU may also contain details of specific areas in which the contributor may not get involved.

A predetermined exit strategy for both parties is an essential part of the document. If either party is no longer happy with the relationship, or where the parties have met their objectives, the MOU must provide an exit acceptable to both parties. The MOU defines mutually beneficial success indicators, at which point the beneficiary may buy out the contributor.

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