The Coronavirus pandemic has put insurmountable pressure on small businesses, and it is going to become even more difficult for Exempted Micro Enterprises (EMEs) that do not have Broad-Based Black Economic Empowerment (BBBEE) on their agendas.
President Cyril Ramaphosa has intimated repeatedly over the past three months that BBBEE is here to stay and that the Government will aggressively pursue its transformation goals amidst COVID-19. In June, he said that BEE regulations should be enhanced to build a more inclusive economy in the wake of the crisis.1
“For EMEs with no BBBEE plans, doing business is getting tougher. Companies and public enterprises are already prioritising suppliers with a BBBEE rating, the higher, the better. You are likely to be overlooked if your business has no rating.”
“This is, despite that EMEs with a turnover of less than R10-million per year and not black-owned are considered BEE neutral. They are exempted from measurement in terms of the Department of Trade and Industry’s Codes of Good Practice for BBEE and generally ranked at Level 4. However, participating in tenders and securing contracts is going to become increasingly difficult at this level,” says Deon Oberholzer, CEO at Gestalt Growth Strategies.
He says that the shifts in the South African economy, compounded by the COVID-19 crisis, have left many small white-owned businesses high and dry. In terms of the way in which companies develop their procurement policies and requirements, there are two separate lines of recognition requirements. These are typically manifested in two questions; “What BEE Level are you?” and “Are you more than 51% Black Owned?” Many companies have also set minimum requirements for preferred suppliers at Level 3 or better.
To have a chance to get onto preferred supplier databases and to participate in tender opportunities, they seemingly have only two options; one to fabricate some version of a 51% BEE ownership or two, to sell a controlling share of their businesses.
However, Oberholzer warns that rallying to implement a ‘dodgy’ form of BEE ownership through employee share trusts or other similar schemes could expose businesses to the risk of fronting. Answering “Yes” to any of these questions could indicate a fronting risk and answering “Yes” to three or more indicates a definite fronting risk:
1. Do you have the power to unravel or collapse the deal unilaterally by invoking a failsafe clause in the contract?
2. Do you have protection that the “51% shareholder” cannot fire you as CEO?
3. Would the BEE partner receive anything less than what you would get as the owner of the business, excluding a fair repayment arrangement for the shares?
4. Will it take the partner more than eight years to repay the debt from dividends received?
“Whether potential or definite, you do not want a fronting risk. At best, you could suffer the wrath of the BBBEE Commissioner and an investigation into fronting. At worst, you could be sold out of managing your future as an entrepreneur and owner of your business. There is a better way,” says Oberholzer.
“We propose a different path – get to Level 1. While this will not address the ownership issue, it will help organisations to demonstrate that they are actively trying to do what they can to improve their BBEE rating.”
“You can achieve Level 1 with a 10 to 12% BEE ownership, depending on your industry, the profile of your staff and your procurement. You could also look at 26% BEE ownership but structured for maximum points or 30% if you want to push the boundary for the recognition as a Black Women Owned Company.”
“Depending on the profile of your current staff, you could consider several options. These include, amongst others, employing a graduate intern or a working student. Either way, you should probably not have to spend more than 1% of your payroll to get full points for skills development and be able to take a big jump on the employment equity points.
“On procurement, look at the nature of your procurement for opportunities. Our experience is that most companies would get most of the points for procurement with very slight interventions,” recommends Oberholzer.
He cites examples of how two EMEs can achieve Level 1 status without selling majority shares. The first, a service based company with R2.3-million in total revenue, sells 25.1% to a BBEE partner, employs a black female graduate intern on a recognized internship programme as an assistant bookkeeper and pays a small bursary for a learnership for a black individual with disabilities. Including the cost of other BBEE-compliant initiatives for Enterprise -, Supplier – and Socio-Economic Development, and BEE verification, the total cost comes to under R100 000 and the company achieves Level 1 status.
A second larger business with an annual turnover of just under the R10-million EME threshold, sells 10% ownership to a BBEE partner and recruits general workers via a recognised internship programme and the YES programme. The YES programme does not elevate EME’s that rely on exemption, but can assist EME’s that comply with B-BBEE codes to gain two levels on their scorecard by employing as few as two people on the programme, one of whom should be employed permanently at the end of the contract. The organisation also provides a small bursary for a disabled worker, and sends the most promotable team leader on a management development course. They achieve a Level 1 status for an incremental investment of under R150 000.
Oberholzer points out that each company is different, but typically, EMEs can achieve and retain Level 1 for much less than R100 000 per annum. If done correctly, most of it would be an investment in the benefit of the staff and company. This could be funded from the potential growth of the company and is a less costly alternative on every level for any business owner not ready to sell 51% of their company.
Oberholzer concludes: “The pressure is on for EMEs to get to a higher BEE Level or lose out. Transformation is high on the list, and it is going to be ‘survival of the BEE fittest’ in the future. You could open many doors of opportunity for your business if you can show a SANAS Level 1 BEE certificate to your clients or potential clients. Is complacency worth it if you risk losing your customers by staying at Level 4?”
- writer, B. t. (2020, 06 19). ramaphosa-says-south-africa-should-use-the-coronavirus-pandemic-to-strengthen-bee. Retrieved from Businesstech: https://businesstech.co.za/news/business/408979/ramaphosa-says-south-africa-should-use-the-coronavirus-pandemic-to-strengthen-bee/