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.

This then becomes a watershed decision to the SME owner, as he now has to relinquish control over the business, which has possibly taken him a lifetime to create. Should he elect to remain in the business as a minority shareholder, he would want to make sure that the BEE party taking over the business will indeed succeed in operating it successfully.

In most other cases it will suffice to accommodate a BEE party with more than twenty-five percent equity in a business.

The minimum shareholding is twenty-five percent plus one share, which will provide the BEE party with a strategic shareholding, as this percentage equity is sufficient to stop any special resolution a company wants to pass in term of the Companies Act.

Therefore, the secret in selecting a suitable BEE party ultimately lies in the success, which a business has achieved in the past and the extent to which this success is reflected in its audited financial statements.

Many SME owners feel uncomfortable with the thought of sharing their business with an outside party and questions relating to the day-to-day running of the business, the decision-making process, remuneration policies, transfer of shareholding on death or disability of a shareholder and many other related issues need to be answered.

The important issue to remember when accommodating a BEE party as a shareholder in a business is that shareholding in a business does not equal employment.

Shareholding in a business provides the shareholder with certain rights and obligations as shareholder. These rights and obligations are usually contained in a Shareholders Agreement as well as the Articles and Memorandum of a Company.

Employment on the other hand is usually governed by a proper Contract of Employment, which contains all the employee’s rights and obligations in terms of his employment.

Neither the SME owner nor the BEE party should confuse these two issues at any time.

It is probably the single biggest confusion in the minds of both SME owners as well as BEE parties: the fact that they regard shareholding in a business as a right to employment.

In fact the confusion goes even further as a large number of SME owners and potential BEE parties regard shareholding in a business as a passport to gaining access to employment rights, which goes well beyond the normal rights an employee might enjoy in terms of an employment contract. They believe incorrectly that a shareholding in a business entitles one with employment in that business for as long as one has the shareholding. They also believe incorrectly that a shareholding entitles one to remuneration from the business linked directly to the percentage shareholding and that the remuneration is not as a result of the actual position held in the business.

Every employee of a business is entitled to remuneration from the business based on their employment contract. Shareholders are only entitled to their share of the profits of a business and only once the profits are declared as dividends.

SME owners are usually afraid that a BEE partner might want to drive an expensive vehicle paid for by the business and would have the desire to make huge random drawings from the business. This fear probably originates from the fact that they themselves do exactly that and therefore expect that once a BEE partner comes on board then they will have to share such behaviour.

What the SME owner really fears is that the business simply does not generate enough cash for someone else to share it with.

Fortunately all successful BEE transactions are structured through proper legal documentation, which will always include a detailed Shareholders Agreement, as well as detailed Employment or Management Contracts.

A Shareholders Agreement could provide the SME owner with some protection in the case where it is found that his new BEE partner in the business turns out not to be what he had expected.

Detailed employment or management contracts are essential in all BEE transactions as they provide detailed job descriptions for all shareholder employees. Furthermore they contain details of entitlements of these shareholders as employees.

In other words the Shareholders Agreement together with the employment contracts is a tool, used to contain all parties‘ expectations.

It should become apparent now that once a BEE structure has been put into place with all the necessary legal documentation, it usually contributes to good corporate governance. A suitable BEE party to be accommodated in a business by way of shareholding should have no problem in adhering to proper corporate governance.

With more than one shareholder involved in a business it becomes more difficult for a SME owner to treat his business as his personal banker.

It is in both parties‘ best interests to support all efforts relating to the drafting of proper legal documentation and a suitable BEE party would usually have a clear understanding of the difference between Shareholding and Employment and the rights and obligations pertaining to each.

The most sought after BEE party is without doubt, someone who has such powerful connections that he can provide the SME owner with any number of new sales contracts at profit margins, which are usually only dreamt of.

Maybe such a party does exist somewhere, but if so, this party will be in such great demand that it will not have time to breathe!

What every SME owner really wants, is a wizard with a magic wand in the form of a BEE party, who can turn his business into a money-making machine, without requiring any risk to or effort from him.

Most SME owners would tell you that they would gladly accommodate such a wizard as a BEE partner, as the financial gain will far outweigh any downside which could possibly accompany a BEE partnership.

On realising that such a BEE wizard does not exist, a large number of SME owners then decide to rather sell their business in its entirety, or operate it as is, until the lack of BEE credentials causes such a great loss that they will have to close it down.

SME owners, who regard BEE as an opportunity to improve their businesses, need to analyse their business in order to establish the area or areas where there could be possible skills shortages.

These skills shortages could then be eliminated or reduced through the introduction of BEE parties to these areas. Such BEE parties could then be accommodated as business partners in the SME thereby complying with BEE requirements relating to equity holding as well as management.

For example, should an SME not have a suitably capable financial manager, it could recruit a BEE party in the form of a suitably qualified accountant, who is then accommodated in the business not only as the financial manager and/or director, but as a shareholder as well.

In other words the incoming BEE party must be able to add value to the business. If there is no possibility of added value by the BEE party, then such BEE party should not be accommodated into the business.

BEE structures where a BEE party is allocated a shareholding in a SME business, and the BEE party

Does not play an active role in the business should not be entertained by the SME entrepreneur looking to achieve BEE status for his business.

Government-backed BEE funders have a requirement that they only fund BEE parties who are actively involved in a business, actively adding value.

The choice of BEE party is therefore also a factor of the funding mechanism of a BEE transaction.

Should an SME owner then look for a BEE party, whose name could appear on business stationery only, as he wants no involvement by such BEE in his business, he could not make use of government-based funding for such a transaction.

There is a large number of SME businesses, which have done exactly what is described above. This practice does not fat! within the ambit of Broad Based Black Economic Empowerment and SME owners entertaining such structures could in future find themselves not adhering to the Broad Based Black Economic Empowerment Act.

In some ways many SME owners begrudge the policies surrounding BEE as they are under the wrong impression that BEE is a handout to the Historically Disadvantaged Individuals.

Many believe that BEE parties are given funds in the form of grants to invest into business and that these parties do not have to repay such funds to the providers.

Nothing can be further from the truth.

However, this false impression leads to a negative attitude on the part of the SME owner towards BEE. It has a profound impact on the choice of a BEE party when the SME owner then decides to structure a BEE transaction.

BEE rests firmly on economic merit. It is no handout, not to the BEE party, nor to the enterprise accommodating the BEE party.

The SME owner therefore needs to understand that in order to attract a high calibre BEE party; he needs to have a high quality business.

BEE parties who possess the skill, contacts and business acumen can normally add huge value to most businesses and are therefore in great demand, just like anybody with such credentials can add huge value to a business.

These BEE parties choose their involvement in SME businesses from the top down.

The best structured businesses reflecting the highest level of profit with the fewest skeletons in their cupboards are usually selected first.

In other words a business should not become successful as a result of the introduction of a BEE party. It must already be successful at the time of introducing such a BEE party.

The extent to which an SME owner will offer equity to a BEE party in a business is also driven by the requirements set by the customer base of such business.

This could very well be the reason why there are not a lot more BEE transactions done in the SME market, whilst there is a feeling amongst the broader population that BEE is only for a select few, thereby enhancing the perception that BEE is in fact nothing but the enrichment of a few.

Being successful in business could therefore mean different things to different SME owners. One thing remains unchanged however and that is that for purposes of structuring a BEE transaction the level of success is measured by the level of profitability.

Any SME owner therefore contemplating a BEE structure should strive to maximise the business’s profitability and simultaneously embark on a strategy of full disclosure in its audited financial statements.

Many SME owners are aware of these issues discussed above and then decide that the only way they can do a BEE transaction is to establish a separate trading entity as a new venture and to attract a BEE party into this new venture in order not to lose out on possible tenders requiring BEE status from the suppliers.

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.

A. The Ownership Level

The idea behind this level is that it is desirable, equitable and in the interests of nation building for every profit-making organisation operating in South Africa which previously had no black shareholders to begin to have them. The high profile formation of originally NAIL (New Africa Investments Limited) and RAIL (Real Africa Investments Limited), and subsequently the acquisition of significant stakes in Johnnic and JCI by black interests have been the most publicised manifestations of this level of empowerment.

These deals have also put organisations of size similar to Johnnic or JCI at a disadvantage in that there are now expectations of such organisations to do likewise, lest they be seen to be out of tune’ with the times. Whilst there is no specific percentage that tends to be expected, the norm which is beginning to be the starting point, lies between 25% and 30%.

These initiatives tend to be more of an event than a process.

B. The Corporate Advancement Level

This is the traditional view of black empowerment and has largely been thoroughly discussed and debated in the new South Africa. It essentially entails a process whereby an organisation actively and consciously seeks out, selects and recruits black (black is used inclusive of coloureds and Asians) employees with a view towards training and developing them for promotion to senior positions within the organisation.

Virtually all the different terms, except the new incarnation ‘empowerment‘, have been used to refer to these initiatives.

This level tends to be more of a process than an event.

C. The SMMEs Outsourcement Level

Although not generally spelled out, this level tends to be directed at black Small, Medium and Micro Enterprises. The expectation here is that well established organisations need to actively seek out these small, usually black fledgling businesses and help them to grow by providing them with contracts; what Clem Sunter refers to as the Dual

Logic economy. Sunter was referring here to the Japanese model where there is a huge army of small companies that are virtually permanent suppliers to the huge conglomerates. The concept of the Dual Logic economy has now been clothed mostly in black empowerment terms.

It becomes necessary at this stage to point out that there is an ill-fated term that _occupied the short interval between Equal Opportunity and Affirmative Action, namely Managing Employee Diversity. It can be argued that had it not been for the dramatic announcements in Parliament by FW de Klerk on 2 February 1990, Managing Employee Diversity would have been the new term in vogue. Naturally, its origins can be traced back to the United States of America, more specifically an African- American management consultant by the name of Roosevelt Thomas Jnr who was arguing that this new term was more appropriate to the 1990s than the other terms `whose time had passed’. Managing Employee Diversity was to have the shortest shelf life in this arena.

Affirmative Action, the term of the post 2 February 1990 era, seems to be dying a slow death. It is now being substituted by the term ‘Empowerment,’ without the prefix ‘Black‘. A number of business and political leaders have indicated to me that a preference for this term emanates from the following considerations:

1. The prefix ‘Black‘ is seen to be too Africanist in its tone, thereby risking the alienation of Asian and coloured people who were also victims of past discrimination.
2. Furthermore, the prefix ‘Black‘ is seen to be excluding other categories of previously disadvantaged people like women of all colours, the disabled, the homosexual et cetera.

It is my contention that empowerment deals do not constitute affirmative action programmes and that the use of these terms as synonyms is likely to create a legacy that will come back to haunt the business and political leaders of this country.

Nevertheless it becomes important to acknowledge that the process of integrating blacks and other disadvantaged peoples into the economic mainstream of this country can broadly be divided into the following three levels. These three levels are beginning to be reflected, for instance, in tender document criteria that government departments or parastatals use in determining an organisation’s ‘empowerment‘ track record.

As alluded to earlier, the traditional South African view has been to concentrate on the recruitment and advancement of blacks and women up the ranks of an organisation, as well as their appointment, usually as non-executive directors at board level. The new view regards these initiatives as important parts but not all of what is now referred to as ‘empowerment‘.

A perception was beginning to develop in the corporate boardrooms that, despite the pomp and fanfare with which many of these black advancement programmes had been launched, results had been less than inspiring. There was certainly consensus amongst both advocates and detractors of black economic advancement that the results were poor, although there were sharp differences amongst the two groupings on the reasons behind this poor showing. For instance, the detractors would argue that there was now more than enough evidence that blacks do not have what it takes to become good managers, whilst advocates, on the other hand, were arguing that these programmes were being sabotaged by white middle management. Nonetheless, the failure with which the label ‘black advancement‘ was being associated virtually confined the term to the shelves.

Politically there were conflicting signals from the government on how it sought to deal with the question of black socio-political and economic empowerment. This confusion was clearly illustrated by the man who had been put in charge of this process, the Minister of Constitutional Affairs, Mr Chris Heunis. In 1986, when asked to explain what the National Party’s policy on black socio-political and economic empowerment was, this was his erudite response: The whole political concept of consociationalism is predicated on the existence of groups which should be entitled to a measure of segmental autonomy.”

Corporate South Africa’s obsession with the latest management jargon from the United States of America and Europe was to manifest itself once again. It must be recalled that in the United States and the United Kingdom, this was the era of Ronald Reagan and Margaret Thatcher respectively. Conservatism on issues around the advancement of corporate minorities in these countries was rife. A new ‘politically neutral’ term was then coined by the army of management gurus from these countries, Equal Opportunity. This approach was seen to be premised on the assumption that fairness exists when people from all backgrounds are given equal opportunity to succeed or fail in society, unlike the ‘reverse discrimination’ of affirmative action and black advancement. This thinking was to find a ready audience in South Africa and it became the rage of the eighties.

1. Who is my customer?

For many businesses, an emerging black middle class represents a huge new market opportunity. Given these new markets that are developing, you need to answer the following question: ‘Who is going to be my customer in the next five to ten years?’ Leading on from this, you need to ask, ‘What action needs to be taken that will help me understand this future customer and what they value?’ Can your existing team understand the needs of this market? You might literally be speaking another language. You need to sow the seeds now to build this sense- making capacity. List the actions that result from this question.

2. What actions can I conceive to enable transformation? Given the specific purpose and nature of your business, ‘What actions can I conceive that will enable transformation?’ For example, a business school could significantly enable black entrepreneurs by offering them free courses. Oddly, many businesses become so focused on the seven scorecard dimensions, they forget to ask, ‘Given who I am, how can I help transformation?’ List the actions that result from this question.

3. How do I put growth and transformation into tension? Transformation actions that also grow your business can be explored through asking the question, ‘How can I action transformation so that it enhances the value drivers and furthers the goals of the business?’

This question can be posed by placing your business’s purpose and value drivers with their corresponding goals on the same page as the dimensions of transformation to be considered. This should then ensure that the company explores the two at the same time. The tension that exists between the two aspects requires creative and insightful thought to unlock powerful possibilities, and so should be explored with a team of key people who might have the right insights to develop these transformation action items. It has been said that freedom results from the creative conversion of constraints, which is the core of what is being attempted here.

The team should not neglect the action items needed to achieve business goals in favour of action items aimed at transformation, but rather action the developed goals in such a way that transformation is enabling the business. If possible, the team should avoid setting additional goals that have a transformational component unless these goals clearly enhance the value drivers already identified.

The team should also avoid a value driver called empowerment, as it will allow this category to become potentially a catchall for any actions that have a transformational impact, and yet which would dilute the creative tension. The overall intention is to find actions that make good business sense and give impetus to transformation.

The nature of these action items are very specific to each organisation and might dig right into, and affect, the purpose of the business. They need to be explored more broadly than just the specific dimensions of the scorecard, and rather focus on upholding the ethos of sustainable transformation for South Africa.

I once spoke to an employee who worked in the packing division of a client, and asked her what she does. She described the nature of her job in physical terms. When I pushed her to see whether she understood how her job fitted into the ‘bigger picture’ of the business, it quickly became clear that she had no idea what the end product was, or even what the business was about. How does she feel when asked at home what she does? How energised or ‘empowered’ is she? Do we not sometimes resign ourselves to the same fate? Are we also just a small cog in a big machine? Don’t rock the boat and get on with the job!

The value drivers and business purpose can be used to counter this tendency that occurs due to the increasingly specialised nature of our workplace. They can be used not only to get everyone singing in tune, but singing with pride and gusto.

Developing a business and transformation strategy

Every business takes its resources and focuses them around its purpose, while driving down its costs and driving up shareholder value. This is the essence of all business, and greater margins result from a larger gap between costs and the value the customer experiences.

The need to drive up value while simultaneously driving down costs is true on an aggregate level as well as an individual level for every employee in your business. But these broad statements need to be translated into specific changes in action or behaviour, or there is no point to them.

Determining the goals for each value driver in your business

Goals are descriptions of what you want to achieve in order to drive up the value for the client. A similar brainstorming process to the one discussed earlier can be used, but now ask the team to respond to the question: ‘What goals can be put in place over the short, medium and long term to enhance and enable each of the value drivers in turn?’

Determining the actions – giving impetus to the goals

Each goal needs to be studied in turn in order to develop specific actions that will transform it into a reality. My experience is that three well- conceived, high-level actions at senior level are more than sufficient to catalyse the goal, so resist the temptation to list a million actions that won’t see the light of day.

Now that you have a value-based view of your company strategy, how do you bring transformation into the picture?