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Factors and Considerations in Black Economic Empowerment Deals in the Small and Medium Size Enterprises Market

Literature › Works

Charles Smal (2008). Factors and Considerations in Black Economic Empowerment Deals in the Small and Medium Size Enterprises Market. Mini research report, MBA, University of Stellenbosch (Stellenbosch Business School). University of Stellenbosch.
Type thesis
Scope Post-1994 South African economy
Method synthesis review
Period studied 1996–2008
Regions South Africa
Themes transition post apartheid, business and state, macro fiscal finance debt, inequality poverty unemployment
Citation key smal2008

Argument

The report is a practitioner's guide to structuring ownership-based BEE (black economic empowerment) deals in the SMME market, written from a banking and finance viewpoint. It argues that ownership is only one element of the BBBEE scorecard, but that the procurement 'cascade effect' pushes small firms toward compliance. Deals must be tied to strategy and value creation, fairly valued (earnings multiple, NAV, DCF), and structured for tax and company-law constraints, typically through SPVs. They must also be funded through a mix of equity, mezzanine and senior debt. It rests on secondary guides, industry surveys and interviews with bankers, not original economic-historical research.

Evidence and method

Secondary practitioner literature (Janisch 2006; Balshaw & Goldberg 2005; Biermann 2005), the KPMG 2007 BEE survey, DTI strategy documents, valuation guidelines (AFIC/BVCA/EVCA 2005; Laro & Pratt 2005; Rappaport 1979), and personal and e-mail interviews with Nedbank, ABSA and SARS staff. Also the Companies Act and Income Tax Act provisions and the 2007/8 Budget Tax Proposals, plus annexed data (Abrie & Doussy tax-incentive awareness table, SARB rates, SMME definitions).

Findings

  • BEE is framed as redress for apartheid inequalities, justified in part to prevent social or political instability. (p. 23)

    BEE is aimed to redress the inequalities from apartheid and create a more economically active society representative of all cultures

  • BEE legislation binds only the state, but the cascade effect through supply chains pressures private firms to comply. (p. 23)

    BEE legislation is only legally binding on the state and state-owned entities. However, although organisations are not compelled to commit, the cascade effect of BBBEE will be felt through the business supply chain

  • Public-sector procurement is a major driver of SMME BEE compliance. (p. 16)

    50 percent of Small medium and micro enterprises (SMME) responded that more than 25 percent of their business was generated from the public sector

  • DTI reports that SMME growth since 1995 has been strongly black-owned. (p. 20)

    A DTI study has indicated that the number of small businesses has grown by 150 percent since 1995 of which 87 percent were black owned

  • State BEE incentives are underused, in part because consultants dominate applications and access requires prior investment or matching funds. (p. 26)

    ±85 percent of all applications for these incentives is received from consultants. These consultants are considered to have a limited network to black entrepreneurs.

  • The scorecard sets the target for black shareholding at 25.1 percent. (p. 29)

    The target shareholding by a black person should be 25.1 percent.

  • Companies Act sections 38 and 226 restricted internal financing of black share purchases, driving the use of NEWCO/SPV structures. (p. 66)

    Broadly defined these Acts prohibit a company to raise funds internally within the current company profile or structure to allow for the transfer of ownership and control to black

  • The December 2007 amendment to section 38 allowed company financial assistance for share purchases subject to solvency and liquidity tests. (p. 70)

    Amendment to the Section 38 of the Companies Act came into affect on 14 December 2007.

  • BEE deals are highly geared because black partners lack capital, so funding depends on debt. (p. 93)

    BEE transactions tend to be highly geared as a result of potential black partners that do not have cash reserves to fund the acquisition and therefore the reliance exist largely on debt funding

  • Bankers in the SMME market commonly apply P/E multiples of about four to six, effectively a five-year payback rule of thumb. (p. 51)

    the average range of P/E multiples most commonly noted ranges in the region between four and six