By Anton de Wet CA(SA), B-BBEE Specialist and Managing Director of NetValue™ Equity Partners. He assists companies in implementing sustainable B-BBEE strategies and equity ownership transactions.
Broad-Based Black Economic Empowerment (B-BBEE) is a uniquely South African concept. It is government legislation intended to right the wrongs of the past. Trying to do so through legislation is a debatable matter but this is what our government has decided to do and trading freely in the new South African landscape, requires compliance with this unique legislation.
As a dairy farmer, you (and perhaps generations of your family before you) have worked very hard to build an agri-business that generates an income for you and your farm workers. In the process, you have also created a measure of wealth. To now be informed that you need to share this with others will naturally come as a shock. In this article, we want to explore some of the technical requirements that has the potential of taking the inherent “sting” out of B-BBEE compliance.
This discussion is based on the Draft Amended AgriBEE Codes that are expected to be published soon. What are some practical factors that a dairy farmer can consider when planning for B-BBEE compliance?
The size of your dairy division
Most farmers house all their farming operations, such as their maize, dairy and beef operations, in a single legal entity. This means that more than one ‘business’ is actually being housed within this one legal entity whether it be a Sole Proprietor, Trust, Closed Corporation or Private Company. A popular practice by many companies in recent years is to do a corporate restructure resulting in one or more of these ‘businesses’ being housed in their own legal entity.
Turnover: <R10 million
Not all businesses are equally sensitive to B-BBEE pressure from their clients. It also makes it easier to identify B-BBEE partners that are interested in getting involved in a specific business. It has the additional benefit of such an entity having its own annual turnover which may qualify the business as an Exempt Micro Enterprise (EME) which qualifies for an automatic B-BBEE status. An EME will be a business with an annual turnover less than R10 million. An EME that is majority white-owned qualifies for an automatic level 4 status and, once the Amended AgriBEE Codes are published, an EME that is at least 51% black-owned will qualify for an automatic level 2 status. Under the Amended AgriBEE Codes, an EME will have to prove its status by means of the farmer issuing an annual sworn affidavit. An EME is then exempt from having to comply with any of the other B-BBEE requirements.
Turnover: R10 million to R50 million
For a business with an annual turnover between R10 million and R50 million (in terms of the Draft Amended AgriBEE Codes), known as a Qualifying Small Enterprise (QSE), there are two routes to becoming B-BBEE compliant. The first route involves implementing a B-BBEE strategy that addresses all five of the QSE scorecard elements namely:
These all have their own specific targets. To achieve a B-BBEE status level all these elements must be addressed in each financial year. This is administratively very burdensome, extremely expensive and often results in a poor B-BBEE status level. It is expected that very few QSE’s will opt for this route.
The second option available to a QSE is to implement 51% black equity ownership and qualify for an automatic Level 2 status. This exempts the business from the scorecard requirements and is the route that almost all QSE’s are currently following. If such an equity transaction is properly structured, it can meet the expectations of all the parties without putting the business at risk.
Turnover: >R50 million
A business with an annual turnover of more than R50 million is subject to the five scorecard elements mentioned and an annual verification by an accredited agency who will issue a verification certificate valid for 12 months.
B-BBEE doesn’t have to be a “give away”
The thought of “giving away” a part of the business, is one of the biggest concerns when it comes to implementing B-BBEE. This concern can be mitigated by having the transaction structured by a B-BBEE expert. Existing equity value can be ring-fenced to the benefit of the farmer to whom it belongs so that the B-BBEE partners only share in the future profits they help generate. As is the case with any business, a successful dairy operation heavily relies on the day-to-day expertise of the farmer and the existing farm workers. In most cases, these loyal workers are by far your best B-BBEE partners as they are already contributing to the success of the business. Structuring an equity (ownership) transaction with your farm workers who are committed to continue making a meaning contribution to the business can be a win-win situation for all. Should the equity transaction result in the workers holding more than 51% of the dairy’s trading operations, the business will qualify for the automatic level 2 B-BBEE status once the amended legislation becomes effective.
The biggest “sting” in B-BBEE is often related to the existing assets owned by the farmer such as his land, buildings and equipment. Does B-BBEE require that somehow these assets need to also transform? No. Many farmers hold these assets in separate legal entities such as Trusts or Property Companies that rent these assets to the “trading business”. B-BBEE requires the transformation of the trading business whether such business owns capital assets itself, or not. What is important is a genuine commitment to empower the B-BBEE partners by means of a reasonable profit-sharing scheme, without putting at risk the business generating such empowerment.
Does B-BBEE have a return on investment?
Absolutely, if done the right way. Farmers and their staff have all the ingredients necessary for a highly successful B-BBEE strategy. The farmer possesses the expertise, capital and market share while the farm workers are incentivised to not only continue contributing but to take their personal interest in the business to a whole new level. B-BBEE, if done right, has the potential to positively transform the business dynamics within a farming operation. This leads to higher enthusiasm and productivity, something that has already surprised many farmers, who don’t regret their decision to transform their agri-businesses. From a financial perspective, a good B-BBEE status provides a competitive advantage and keeps clients satisfied which translates into increased revenue and equity growth for everyone involved.
Published on Thursday, 16th November 2017 - 11:19