BEE Partner, South Africa Economy Watch

It is substantially more difficult to prove that a business, which is about to be started, will in fact be successful. Such a venture has no historical audited financial statements reflecting a good profit history. Funders of such ventures are by nature extremely suspicious, and always look for some form of concrete evidence that a start-up business venture will succeed.

Without a sales history it becomes very difficult to establish what the possible future sales of a new business will be. This is possibly why so many different financial institutions request copies of sales contracts or letters of undertaking from potential new customers of a new start-up business when evaluating if such a start-up venture could be successful. This request is also quite common from the venture capital funders in South Africa.

There are even BEE funds available in South Africa today, which can only be accessed by a new start-up BEE business if such new business has firm written contracts in hand.

Many SME businesses have however been started in the past by entrepreneurs who possessed a certain technical skill, which was then sold to a customer base. Therefore not all of these businesses, which became successful, started off with firm contracts in hand.

A BEE party wanting to start a new business (grass- roots operation), and needing to raise capital for it, could therefore only do so by having prepared a convincing plan as to how it is going to be successful. This plan must be originated by the aspiring BEE entrepreneur and not by his consultants as the entrepreneur is usually tested by the (under to establish if the entrepreneur has the ability to transform his plan into reality.

I have come across many SME owners, who have identified BEE as of strategic importance to their businesses, but are simply not prepared to share their existing successful business with a BEE party.

Some of these operators have then felt it good to form separate legal entities, which is always without any financial substance, to accommodate BEE parties therein in order to comply with their customer’s BEE procurement policies.

Such ventures are by their very nature start-ups. It is designed by the SME owner only to benefit himself and not the BEE party. This is usually done by ensuring that the new venture has no assets and constitutes a selling organisation only. Every product sold or service rendered by this new venture is acquired through the SME owners‘ existing business at a price which ensures that the profit made from each transaction is retained in the existing SME and only the costs are covered in the new venture.

It is no wonder that I quite often hear from BEE parties themselves that they have had bad experiences with BEE transactions. It is because they have been exploited by some SME owners for personal gain. One often tends to think that it is only the SME owner who has had bad experiences from BEE transactions. After all every SME owner knows someone who knows someone who has had such a bad experience.

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