By Gareth Owen, Corporate Finance Transactor, Sasfin Capital
Building a culture of innovation is a prerequisite to competing in business. Innovation may require some risk-taking,
the adoption of disruptive business models and overall fresh thinking that will result in a business getting the edge over its competition.
The need for a new approach
Applying a sharp focus and understanding of one’s business,
gears a business owner to implement the most effective solutions to improve efficiencies and enable
growth and success. The same level of scrutiny needs to be applied by the corporate advisory partner that is appointed to direct and ensure the optimal B-BBEE structure. The historically compromised success rate of introducing empowered parties to a business highlights the risk of applying a routine approach to these transactions. The reality is that transaction advisors cannot employ a generic approach to their solutions. Through innovative thinking and without necessarily selling equity, a business can greatly increase its empowered ownership and ensure compliance under the equity ownership component of the B-BBEE scorecard.
Thinking differently about B-BBEE
The Department of Trade and Industry’s Code Series 100: The Measurement of the Ownership Element of Broad Based Black Economic Empowerment, Statement 102: Recognition of the Sale of Assets, Equity Instruments and Other Businesses states: “a seller that has concluded a transaction involving sale of an
asset, equity instrument or business of a separately identifiable business may claim the benefits provided in its ownership scorecard.”
Conventionally, businesses are sold through one of two methods, either by:
1. A sale of shares, or
2. A sale of business (i.e. selling the income producing assets in the business.)
The latter is more frequently adopted when purchasing smaller, owner managed businesses. mainly for the purchaser to avoid potential contingent liabilities attached to the selling entity. The sale of business enables the purchaser to acquire the operating assets from a business without affecting shareholding in either
business. The same logic can be applied to empowerment transactions whereby an empowered party purchases the operating assets from a business for revenue generating purposes.
This results in the selling entity receiving scorecard ownership points because an empowered party subsequently owns and manages the assets.
For example, take a factory floor, which manufactures two products using two machines earning R1 million each a year and carrying the same value at any given time. The manufacturer can dispose of one of the assets to an empowered party as an operating business. The manufacturer would then receive the equivalent ownership points as disposing of half of the shares in the business, without actually parting with any shares.
This becomes particularly useful in the case of property. If owned by the business, property is very often the largest asset on a privately owned business’ balance sheet, but has a lower direct impact on earnings when compared to revenue generating assets. Facilitating a B-BBEE transaction through the sale of and subsequent lease back of the property, to a black controlled and managed property fund for example,
can result in a marked increase in B-BBEE ownership points for the seller and can be done without any significant effect on earnings.
It is therefore possible to structure transactions innovatively to benefit your business and its B-BBEE credential most effectively whilst meeting the objectives of the codes.