It is a fact that Ownership is a BEE stumbling block for many traditional and family-owned businesses. However, it is a little-known fact that using the 'sale of assets' mechanism to obtain black ownership, as opposed to the traditional selling of equity, presents tangible opportunities to support black entrepreneurs, says Dewan Lombard, Verification Analyst at EmpowerLogic.
The 'sale of assets' facet is held within the Ownership element of the Amended Codes is possibly the most under-utilised and least understood sub-measurement within the Ownership element.
The business opportunity
Organisations frequently sell or dispose of assets that are regarded as non-crucial to their current operations. The sale of non-core, non-performing or unrelated business units happens on a regular basis, as organisations aim to focus and streamline their operations.
'Sale of assets' is otherwise referred to as Series 100 and defined in Statement 102.
Based on the merits of Statement 102, organisations should identify assets within their operations that are not adequately aligned to their current strategy or not contributing to their desired return on assets. The evaluation of such assets should be based on increased profitability, as well as the focus and sustainability of an organisation.
Selling such non-core, non-performing or unrelated business units, will not only generate cash to invest in other focus areas, but may favourably impact on the Ownership element of an organisations scorecard.
The B-BBEE opportunity
From here on, the term 'new black-owned entity' relates to the party purchasing the asset. The term 'selling company' refers to the organisation selling the asset.
Classifying Ownership as one of the three priority elements within the 'Amended Codes', has presented a new set of challenges for business owners with a turnover in excess of R10-million a year. The consequence of discounting will see many organisations disappear from the transformation radar.
In order to enhance the Ownership element of a scorecard, consideration should be given to selling non-core assets, such as:
- Product lines that are not synergistic with other business operations
- Branch offices or subsidiaries that do not contribute adequately to profits
- Plant and machinery that is under-utilised or outdated
- Functions such as logistics - warehousing and distribution - that are not core to other operations
- Property that could be sold on then leased back from the buyer
In B-BBEE terms, the actual asset being sold is referred to as a 'separately identifiable related business' (SIRB). This is defined as a business that is related to the selling company by virtue of being a subsidiary, joint venture, associate, business division or any other similar related arrangement, within the Ownership structure.
Not qualifying as a 'sale of asset' transaction are transfers by way of licence, lease or similar legal arrangements that do not confer unrestricted ownership, in addition to the sale of franchises.
Sale of Assets Scorecard Criteria
1. The SIRB transaction must result in the creation of a viable and sustainable business opportunity in the hands of black people. There is no requirement that the buyer must be 100% black-owned. The equivalence % is calculated and then applied to the % black shareholding of the buyer.
2. The transaction must result in the transfer of critical, specialised and/or managerial skills, in order to develop the skills of black people.
3. There may be no unreasonable limitations in relation to clients and/or suppliers of the new black-owned entity.
4. Any commercial arrangements between the selling company and new black-owned entity must be at arm's length, based on a fair and reasonable basis.
5. Organisations are encouraged to enter into a formal commercial agreement with the new black-owned entity, which will be in force for at least a three-year period. This agreement will consider and detail all aspects as mentioned above.
Adhering to each of the five criteria mentioned will qualify the selling company to optimise the 25 allocated points within the Ownership element on their scorecard. The total Ownership score achieved through sale of asset is determined by the black Ownership status of the new black-owned entity, taking into account the actual acquisition of debt incurred.
The full allocation of Ownership points is awarded in line with achieving the following targets, otherwise pro-rata accordingly:
- The value of the asset sold is at least 25% of the value of the selling company
- The new black business entity is 100% black owned.
- The new black business entity is 40% black-women owned.
- 8% of the owners of the new entity are classified as black new entrants who have not previously entered into similar agreements exceeding R50-million.
- 12% of the owners of the new black business entity are members of a black broad-based scheme, co-operative or other black designated group.
- The acquisition of debt is structured over a nine-year period. This should be in accordance with the time-based graduation factor provided in the B-BBEE Codes of Good Practice.
Funding for such transactions is allocated through the 'designated black enterprise funding structures' held within the Department of Trade and Industry and/or the Department of Small Business Development.
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