Factors and considerations in black economic empowerment deals in the small and medium size enterprises market

Smal, Charles (2008-12)

Thesis (MBA (Business Management))--Stellenbosch University, 2008.

Thesis

ENGLISH ABSTRACT: Business persons engaging in BEE deals, pertaining to ownership, encounter many obstacles and challenges relating to the formulation of appropriate structures and solutions during the deal process. The SMME market is arguably one of the most critical contributors towards the SA GDP and a sector of the economy with the most growth potential as noted from recent history, especially relating to BEE ownership. It is in the above frame of reference that the research report attempts to follow a logical flow of events that the business persons in the SMME market would encounter. The report therefore has a holistic approach to this market and although many of the concepts could be applied to a variety of industries and even to other market segments, based on size, the primary objective and research has been centred around SMME’s. The core concepts that are covered relate to: - Understanding the essence of BEE and BBBEE as well as Government’s role as conduit to empowerment. The various elements under the BEE scorecard will also be a prominent factor as ownership only accounts for a portion of the entire BBBEE rating. - Aligning the BEE deal to strategy is a crucial consideration and entails attracting the right partner and ensuring that the BEE transaction is directed at value creation, growth and sustainability of the business. The transaction should make strategic and economic sense. - Determining firm value is in all probability one of the most complex issues and business owners should merely attempt to understand and interpret the vastly complicated process that may be presented by business brokers or valuers that facilitate the BEE deal. The fair value concept and required adjustments could be influential in the valuation process as well as choosing the correct valuation methodology. - Business tax structure. This is also a complex process that may vary significantly from business to business. Certain legislative impediments are influential and various amendments may also influence future structuring of BEE deals. The use of SPV’s is a prominent theme highlighted in this research report as it is very often the most preferred structure. - The BEE deal. This may have to consider hybrid financial solution from various sources, such as senior debt, franchise funding, mezzanine debt including venture capitalists, non-traditional lending sources and alternative supporting or indirect funders to the business. The lending criteria principles relating to cash conversion cycle, free cash flow and sustainable growth rate have also briefly been covered. BEE transactions inevitably enter an area of uncertainty for business persons when it comes to drafting business plans, determining the BEE scorecard, structuring the new shareholding and many other factors. In other words, they may not have the necessary business or financial acumen to prepare a satisfactory business proposal to attract lenders to the deal. It is therefore crucial to understand the different elements of the BEE deal formulation process, which is exactly the intent of this research report.

AFRIKAANSE OPSOMMING: Besigheidspersone wat SEB-transaksies met betrekking tot eienaarskap aangaan, ondervind baie struikelblokke en uitdagings in verband met die formulering van toepaslike strukture en oplossings wanneer die transaksie aangegaan word. Die KMMO-mark is stellig een van die mees kritieke bydraers tot die SA BBP en ’n sektor van die ekonomie met die meeste groeipotensiaal, soos die onlangse geskiedenis ons geleer het, veral met betrekking tot SEB-eienaarskap. Dit is met bogenoemde in gedagte dat hierdie navorsingsverslag poog om ’n logiese vloei van gebeure te volg wat die sakepersone in die KMMO-mark sal teëkom. Die verslag het dus ’n holistiese benadering tot hierdie mark en hoewel baie van die konsepte op ’n verskeidenheid nywerhede en selfs op ander marksegmente, gegrond op grootte, toegepas kan word, is die primêre doelwit en navorsing op KMMO’s gerig. Die kernkonsepte wat behandel word, het betrekking op: - Begrip van die kern van SEB en BBSEB asook die Regering se rol as geleibuis tot bemagtiging. Die verskillende elemente van die SEB-telkaart is ook ’n belangrike faktor aangesien eienaarskap net ’n gedeelte van die algehele BBSEB-aanslag verteenwoordig. - Die inlynstelling van die SEB-transaksie met die strategie is ’n kritieke oorweging en behels die lok van die regte vennoot en die versekering dat die SEB-transaksie tot waardeskepping, groei en volhoubaarheid van die besigheid gerig is. Die transaksie moet strategiese en ekonomiese sin maak. - Die bepaling van stewige waarde is in alle waarskynlikheid een van die mees komplekse kwessies en besigheidseienaars moet bloot probeer om die enorme gekompliseerde proses te verstaan en te interpreteer wat deur besigheidsmakelaars en waardeerders wat die SEB-transaksie fasiliteer, voorgelê word. Die billikewaarde-konsep en die vereiste regstellings kan invloedryk op die waardasieproses asook die keuse van die korrekte waardasiemetodologie wees. - Besigheidsbelastingstrukturering is ook ’n komplekse proses wat aansienlik van besigheid tot besigheid verskil. Sekere wetlike struikelblokke is invloedryk en verskeie wysigings kan ook toekomstige strukturering van SEB-transaksies beïnvloed. Die gebruik van SDV’s is ’n prominente tema wat in hierdie dokument uitgelig word aangesien dit in die reël die verkieslikste struktuur is. - Die SEB-transaksie sal moontlik hibridiese finansiële oplossings van verskeie bronne soos seniorskuld, franchise-befondsing, tussenskuld insluitend waagkapitaliste, nie-tradisionele uitleenbronne en alternatiewe ondersteunende of indirekte befondsers van die besigheid moet oorweeg. Die uitleenkriteriabeginsels met betrekking tot kontantomskeppingsiklus, vry kontantvloei en volhoubare groeikoers word ook kortliks gedek. SEB-transaksies betree onvermydelik ’n gebied van onsekerheid vir sakepersone wanneer dit kom by die opstel van besigheidsplanne, die bepaling van die SEB-telkaart, die strukturering van die nuwe aandeelhouding en baie ander faktore. Met ander woorde, hulle kan moontlik nie die nodige besigheids- of finansiële vernuf hê om ’n bevredigende besigheidsvoorlegging op te stel wat uitleners na die transaksie sal aantrek nie. Dit is dus kritiek om die verskillende elemente van die formulering van die SEB-transaksie te verstaan, wat presies die doel van hierdie navorsingsverslag is.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/966
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