ARTICLE ON BEE - BUSINESS DAY - OCTOBER 2007

Spell out BEE deliverables if you want the real deal

Today we begin a series on private business BEE, the opportunities and pitfalls of empowerment transactions in the private company sector. In the initial article, Kevin Homann, a BEE deal-maker and director of Spirit Capital, considers the potential gap between expectations and the delivery of BEE value …

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Kevin Homann

Loose assumptions and woolly thinking can blight the most promising deal. They have the same effect on black economic empowerment transactions.

BEE deals that work are clear from the outset – either because the parties have known one another well for some time and therefore know precisely what to expect or because the partners have taken the trouble to set out key deliverables.

Unfortunately, some BEE relationships are plagued by misunderstandings, even recriminations, because the owner of the business sees a mismatch between his expectations and the actual value added by the new partner or partners.

In many of these cases, black equity partners – quite rightly – protest that these expectations were never explained and no mechanisms were put in place to measure their contribution. If the transaction terms did not formally cover performance issues, how can they be criticised for non-performance?

The majority owner assumed his new partners realised that the business opportunities they had discussed would have to be pursued; that equity had to be earned by a measurable contribution. Nothing, however, was put in writing.

For their part, BEE partners sometimes complain that white executives have little understanding of how black relationships, family connections and levels of ‘access’ work. A wide personal network is one thing; putting it to work to facilitate business transactions is quite another. The process takes time.

The solution is simple: If you want any deal to work, spell it out. Define the expectations. Set out the limits and timeframes. Make the details clear; make no assumptions.

The definition process fosters discussion of every issue that might lead to misunderstanding. By covering these subjects in depth, there is greater appreciation of each other’s point of view; of what can reasonably be delivered and what can’t.

This is usually new territory for both parties. It is advisable to take it slowly, one issue at a time.

Typically, the private business owner is looking for a partner who participates in the business. He does not want a passive shareholder. He wants a director who attends board meetings and helps drive business strategy.

The owner does not take a partner so he can end up with 75% of the same ’cake’. He wants a cake that will grow at a faster rate than previously as a result of the value added by BEE shareholders.

These expectations have to be set down; just as a business would itemise performance criteria in any service level agreement.

A BEE partner usually takes on debt to acquire equity. It is not enough that the asking price has been reduced to facilitate BEE entry. The new stakeholder also needs help in servicing the loan.

The typical pattern, then, is one where financial requirements sit next to performance requirements. It is logical to address both sets of needs when the transaction terms are established.

The BEE partner is quite within his rights to request that financial incentives be put in place for achieving the required level of performance. An agreement then has to be reached on how performance will be monitored and measured.

Incentives are triggered once the benchmark is achieved in terms of new business growth, expansion into a new customer-base etc.

The incentive might be an increase in dividend payments, further lowering of the purchase price or a performance bonus in cash. Whatever is agreed, it must be precisely defined.

Any transaction, if it is to work, has to be even-handed. Therefore, there also has to be a sanction in place for cases of egregious non-performance. This clause could be invoked in situations where the new partner had obviously misrepresented his ability to add real value to the business.

In a worst-case scenario, this clause could even entitle the original owner to reverse the transaction.

It is unlikely this sanction would have to be invoked. The mere fact that detailed negotiations have taken place on every aspect of performance and reward would give both parties a good insight into what they could do for one another.

If the expectations of either party seem unreasonable, the deal has to be reworked on new terms or the parties have to walk away.

BEE is the basis for the sustained growth of our economy through the meaningful participation of all groups. For the policy to work in practice in business after business, all parties have to be honest and transparent when setting out their requirements.

If new partners can’t be honest with one another, they shouldn’t be going into business together in the first place.

Homann is director of corporate and structured finance service provider Spirit Capital. This is the first in a series of articles on BEE.

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