Johannesburg - One of the most contentious issues for South African entrepreneurs is giving up control of part of their business to black economic empowerment (BEE) shareholders to comply with legislation and scorecards.
Many view this as a critical step to win important tenders and government work, but others see it as little more than a nuisance and a hindrance to building their business.
Getting a BEE transaction wrong can result in significant reputational damage to your business. You only have to look at the recent negative publicity for the likes of JSE-listed ArcelorMittal South Africa (Amsa) and the Kelly Group, which have found themselves embroiled in very public spats around empowerment partners and credentials.
On the flip side, there have been some highly successful transactions - such as the Sasol Inzalo deal - which have seen broad-based empowerment come to the fore.
Paul Janisch, who runs BEE consulting firm Caird, believes much of the negativity towards BEE deals is justified.
"It's an unpopular view but if you want my frank advice, doing a transaction is a waste of time."
According to him, everybody wins when companies move away from equity deals and more towards engaging black-owned businesses in their supply chain.
Black entrepreneurs who have been buying into more established businesses are moving away from a traditional scorecard approach.
"Why own 25% of somebody else's business when you can 100% of your own business is a question which is being asked more and more," says Janisch.
"Management must be clear on the value to be added by the transaction and how that value is to be created," says Lindo Sibisi of Growth Force Consulting.
Sibisi points out that critical issues of any equity transaction include funding, valuation and - most importantly - communication between all stakeholders.
"With an external investor now part of the business, corporate governance becomes an important element of running it. Reporting and decision-making requirements may make entrepreneurs feel constrained, but this is the time for the partners to work together as part of the same team," says Sibisi.
He added: "Good guiding principles of the investment's strategic intent as well as clear goals and responsibilities are imperative."
Financing firm Business Partners' SME (small and medium enterprise) Toolkit provides some easy-to-understand tips to consider when bringing in a BEE partner. These include:
- Don't window dress, ie falsely imply that you are BEE compliant. It cannot be denied that fronting happens, but if you are found out, your reputation could be badly tarnished
- Giving a business an African name does not mean that it is BEE compliant.
- Before entering into a BEE transaction, ensure that you fully understand all the requirements such as the scorecard, codes, charters, etc.
- BEE partners who contribute towards payment for the shares in a business should aim for minority protection if it is less than 50%, ie for certain decisions to require both parties' consent. If there is no contribution, the BEE partner cannot expect this type of protection. And be careful of deals with a buy now, pay later clause.