Broad-Based Black Economic Empowerment (B-BBEE)

B-BBEE Schemes are popular in South Africa in allowing previously disadvantaged individuals to meaningfully participate in the economy.

We have vast experience in both the valuation of B-BBEE Schemes, and the complicated methodologies typically used in this regard.

Very much a South African thing, the topic of B-BBEE is involved. Based on “righting the wrongs” of the socio-political past, BB-BEE helps previously disadvantaged individuals meaningfully participate in the economy, often where there are huge barriers to entry.

The valuation of B-BBEE schemes is particularly interesting but does, unfortunately, involve complicated techniques.

There are, of course, many ways in which to structure a B-BBEE scheme, but the one we are going to focus on here is one that includes Notional Vendor Financing (“NVF”). Under this type of arrangement, the B-BBEE Party (let us call them BP) is given Special Shares in a Business without needing to make any upfront capital payment. BP will, however, normally give up some level of dividends over a specified period of time (which we call the “BEE Lock-in Period”).

If the Business grows decently during the BEE Lock-in Period, then the Special Shares will have value. The greater the benefits that BP brings to the Business, the greater will be the value of the Special Shares. At the end of the BEE Lock-in Period, the Special Shares are converted into Ordinary Shares and BP will be a shareholder in a successful business. If, however, the Business does not do so well, then BP can simply walk away and find better opportunities elsewhere.

If this sounds like some sort of an option arrangement, you would be completely right, and this is how we go about valuing the Special Shares.

Like any other option valuation we need to somehow predict a future Spot Price and measure this against some future Exercise Price. In the case of our B-BBEE Scheme, the Spot Price is the Value of the Business Shares, and the Exercise Price is the Notional Loan Balance. Unlike other relatively simplistic option valuations where the Exercise Price is fixed, the Notional Loan Balance tends to bounce around. And to further complicate things, these jumps are directly caused by movements in the Value of the Business Shares, and so there is some inter-dependency to consider. Complicated techniques such as Geometric Brownian Motion with Monte Carlo Simulations are therefore useful.

The last thing to touch on is the so-called B-BBEE Expense, as this often crops up in conversations involving B-BBEE Schemes. This is simply the shortfall in what BP contributes towards the Special Shares. Put another way, BP should theoretically pay for the value of the Special Shares but because this defeats the point of the B-BBEE Scheme, this shortfall is typically then absorbed by the Business as an Expense.

Please Contact us for more information on how we can assist you with any B-BBEE Valuation queries that you may have.