BEE Partner, South Africa Economy Watch

Potential partners should be courted before finalising the partnership, This can be done by offering the Black party a position on the board or management to assess the fit of the respective parties. Small business may not ordinarily hold board meetings although it may become a useful practice. A board meeting that includes the business’s accountant, BEE party and other relevant parties is a beneficial exercise. Apart from this it is also good business practice.

Appoint the potential partner as a non-executive director. The non- executive director is not protected by employment legislation and the contract can be terminated relatively easily. During the engagement period both parties have the opportunity to establish the value of their association and whether there is scope for profitable cooperation.

After a satisfactory period, if both parties are happy with each other, they may wish to engage in a formal ownership deal.

Young Black people looking to take advantage of BEE should prepare themselves and market their availability for board positions with the view to being considered for empowerment deals. To achieve this they need to understand BEE, the corporate governance issues and the industry they are interested in.

Hard Work

Due diligence is intensive investigation into the proposed deal. A due diligence process is usually driven by auditors and attorneys. It is essential that both parties do a full due diligence investigation before engaging in a BEE transaction.

• The company sourcing empowerment partners must investigate the BEE credentials of their partner in order to establish:
• That the proper agreements are in place
• Who the actual natural-person shareholders are in the case of consortiums, Black investment companies and broad-based groups
• That the shareholders are identifiable as BEE beneficiaries as definedwhether there are any encumbrances over the BEE party that may put the company at risk for the BEE party’s debt
• The ability of the potential BEE party to perform the anticipated role.

While a business may want to enter an ownership deal with a BEE party on face value, the verification agency is obliged to establish that the BEE party is a Black person as defined. A business may find it has entered an agreement that does not give it the anticipated empowerment credentials.

Another reason for doing a BEE due diligence is to establish how many other empowerment deals the Black party is involved with. Is the BEE party capable of maintaining the anticipated obligations to the company if they are appointed in a similar position to 50 other companies?

The due diligence should uncover conflicting relationships such as the BEE party holding an interest in competitors or being influenced by competition. A wise decision can only be taken in full knowledge of the party.

The due diligence must contain a confidentiality clause preventing either party from disclosing information to third parties that it has gleaned from the investigation.

The BEE party must perform a due diligence investigation on the company it wants to purchase. In many instances the BEE party does not do a due diligence because of either lack of knowledge or funds. The result is that they are locked into a deal that is one sided.

Companies often sell off dogs to empowerment parties as part of their empowerment strategies. The unsuspecting Black party becomes tied up with a dying asset that is capable of wasting years of that person’s economic life.

If the BEE party does not have the knowledge to perform its own due diligence, auditors should be appointed to the task. They must establish:

• the trading history of the company
• the level of debt the company is exposed to
• future profitability by reviewing long-term contracts
• the condition, true ownership and existence of assets
• the company’s standing with its current bankers
• the success of competitors
• The true value of the asset
• The extent of transactions between related parties.

It also becomes imperative for the BEE party to have the ownership structured in such a way that liquidation of the company in no Way threatens their personal assets. The correct structures for asset protection and tax efficiency are essential.

Before any agreement is signed, a full understanding of the implications of the deal is necessary.

The process of establishing the appropriateness of the deal is onerous. It shows the benefit to a Black person of taking a non-executive position on the board for a year to establish the true colours of the company.

A well structured BEE deal takes time. The entire process needs to mature with the partners and the more solid deals take up to a year to conclude.

Smaller deals normally take longer than large deals because of the lack of information and availability of key personnel. The other reason is that the owners are always reluctant to sell and the level of self- interest is much higher.

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