BEE Partner, South Africa Economy Watch

A BEE party with the desire to obtain a shareholding in a business must have entrepreneurial traits. He must be prepared to commit himself one hundred percent to the business, which he wants to join as shareholder.

There is no better way to show commitment, than for the BEE party to invest hard earned cash of his own into the business and sign personal surety for any borrowings required to transact such BEE deal. If a BEE party is not prepared to do this, it is clearly not a suitable party.

BEE remains a business issue and a BEE party unwilling to commit is looking for a hand out, which makes it an unsuitable business partner.

Without a financial commitment it is too easy for the BEE party to walk away from the business once it encounters difficult times. The SME owner should never fall into the trap believing that by giving a BEE party a share in his business he will be ensured of a successful BEE business.

Thus far we have considered the suitableness of a BEE party mainly from the SME owners‘ point of view. After all a successful BEE transaction requires a suitable BEE party and it is therefore imperative to consider a BEE transaction from the point of view of such a potential BEE party to

A deal.

A BEE party with a good level of skill and/or network of potential clients is usually offered a large number of opportunities to participate in various business ventures. The BEE party can therefore pick and choose which transactions it would prefer to participate in.

One normally finds that these BEE parties have a good sense of business and are good negotiators as well. They therefore tend to select only those businesses with a proven track record of profitability in which they are prepared to participate in.

Government supported funding is available to BEE parties on the proviso that they make their own contribution of at least two and a half percent of the funding required. This allows a BEE party with some limited capital to acquire shareholdings in a number of businesses through financial gearing.

Although the underlying principal of demanding a minimal deposit of only two and a half percent is sound in as far as it now allows members of the Historically Disadvantaged Groups to gain access to business, it creates at the same time huge opportunities for more affluent BEE parties to further enrich themselves.

Some Government Financial Institutions providing BEE funding are doing it subject to the BEE shareholding in a business become more widely spread, thereby ensuring what they believe is Broad Based Black Economic Empowerment. This is an important aspect to consider when structuring a BEE deal as it prohibits the SME owner selling a part of his business to one individual only.

Sometimes this requirement is not acceptable to the SME owner or to the BEE party. I have found in practice that strong entrepreneurial BEE parties usually have the strongest objection to this aspect as their desire is not to be part of a ’stokvel’.

A further requirement from the funders is that the BEE party acquiring an interest in a business becomes an active member of management of such business. The minimal contribution requirement has resulted in a massive pool of BEE parties hunting for good business opportunities.

The reality is that the number of BEE parties searching for good business opportunities far exceeds the number of good business opportunities. By good business opportunities I mean businesses which are in a position to do a BEE deal. I loosely describe them as businesses which are ‘BEE-able’.

In many instances SME owners blame their inability to affect a BEE transaction on the fact that they can not find a suitable BEE party. What they really mean is that they can’t find a BEE party that can raise the money to pay for its share in the business, not because of unwillingness on the part of the funders to fund such a BEE party, but solely because the proposed transaction does not make any economic sense.

This lack of economic sense virtually always manifests itself in a set of financial statements, which reflect a well understated level of profit.

Most BEE parties searching for investment opportunities are aware of the limited number of SME businesses, which produce financial statements that could be used to raise funds in order to acquire an equity holding therein.

The mystique of where to find a BEE-able transaction is therefore as huge to the BEE party as it is to the SME owner looking to find a suitable BEE party.

BEE should actually be synonymous with entrepreneurship. An ideal BEE party should be entrepreneurial as is the case with an SME owner. This entrepreneurial spirit should drive both the SME owner as well as the BEE party looking for opportunities to find each other.

Sometimes this process is pursued through traditional channels such as business brokers.

Unfortunately the majority of business brokers in South Africa do little more than to introduce a willing buyer to a willing seller.

There is a considerable amount of skill required to conclude a successful BEE transaction and it involves a proper understanding of business, finance, taxation, commercial law, politics and psychology. This is because every BEE transaction involving a SME business requires funding. This funding is mainly non-bank funding, which is based on cash flow lending and which is mainly provided for by government supported financial institutions, thereby adding some political ingredients. Cash flow lending is done on the strength of the cash flow generated by the business and not on the collateral provided to the lender for the loan.

Finding a suitable BEE party therefore requires an objective mind and a proper understanding of the requirements of the funders of these transactions. Emotional issues and personal political views are thus best left behind when searching for a suitable BEE party.

Once a successful business has identified a suitable BEE party it has to ensure that the proposed BEE structure will be such that the business will be able to continue on its path of success.

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