- August 26, 2018
- Posted by: Aviwe Nomnganga
- Category: Broad-based Black Economic Empowerment
The graveyard of B-BBEE deals is huge and this is sad.Based on an examination of many of these deals over the past 15 years or so, I think the reasons are fairly simple as to why many of them have failed and they tend to share similar characteristics. Typically, the reality has been that the B-BBEE partner has had to borrow money to buy their stake and the business has not earned dividends sufficiently so that they could pay for it.
The deal simply breaks down because 1 of 3 things happen:
- The value of the equity was priced too high;
- The cost of debt to fund the deal was too high;
- The business didn’t perform i.e. didn’t do and/or grow well enough to provide sufficient dividends to help the partner repay the debt.
And so ultimately the B-BBEE partner could not service the debt and so never actually acquired/paid for the stake.
The consequences of this were that either the bank (funder) landed up with the stake, or the deal was just scrapped, leaving both the seller and the B-BBEE partner feeling pretty disappointed about the whole engagement…
Furthermore, the sellers often complain that the B-BBEE partner promised it would be able to help grow the business, and therefore the value and/or cost of funding would be covered.
Deconstructing this a bit further, we could suggest that:
Both sellers and B-BBEE buyer were being too optimistic – the sellers in their valuation and the buyers in their expectation of the value they could add….
So, how to fix this?
First of all – get realistic about value….how you may ask?
Well, stripping out a fair bit of the historic value before doing the deal is a good start, then set a fair price: recognize that with the right partner growing the size of the pie, as the old cliché goes, this could grow the size of your slice even bigger in the end…
Then – cut the banks out of the equation – they can add 10-20% to costs of funding and do you really want them as your partner in the end?
As the seller, fund the deal yourself…make it a fair interest rate on the reduced valuation (remember you may have taken a fair chunk of the value out already)…
But be very selective of your B-BBEE partner – make sure that in addition to them enhancing your B-BBEE score – and this should in itself help you grow, that they can add sufficient value that together you can produce sufficient dividend for them to pay for their stake over time…
First prize is a B-BBEE company who has operational capacity and client base that can demonstrate how together you can grow your business.
By Brian Rainier CFA, Director, Pula Capital