B-BBEE OWNERSHIP TRANSACTION – NET VALUE POINTS SHORTFALL
- September 30, 2018
Chances are that the net value calculation is understating the B-BBEE Value.
You might be missing the mark for the sub-minimum for the 40% Net Value Threshold.
Book your consultation and valuation.
- Unnecessarily discounted transaction value on implementation date
- Sub-optimal commercial transaction
- Sub-optimal Net value points for BEE
In an effort to ensure net value points on implementation date, the value is often unnecessarily discounted. This could lead to a sub-optimal commercial transaction.
Entities that wish to claim B-BBEE points under the Net Value component of the Ownership scorecard, need to do so applying standard valuation methodology to all instruments underlying their B-BBEE ownership transactions. Often overlooked, is the value attributable to the limitation of financial risk on debt instruments (the acquisition debt). This risk, which is limited for the BEE participant(s), has an intrinsic value similar to that of an option. The value can be determined by applying standard valuation methodology. The impact would be to recognise value in the hands of black participants. This increases the Net Value ownership points for a measured entity.
Alternative Prosperity, in association with ZAQ Actuaries developed a methodology to value the limitation of downside risk resulting from B-BBEE transactions non-recourse financing. We use option valuation methodology to determine the optionality of non-recourse financing in these transactions. One can evaluate the impact thereof on a company’s B-BBEE scorecard and ownership net value points.
Our team of share valuation experts and actuaries have developed versions of the three valuation models typically used to value such instruments being the Black-Scholes model, the Binomial model and the Monte Carlo model.
We provide an appropriate solution to the specific circumstances.
(valuing the limitation of the B-BBEE transaction’s downside risk and including it in the ownership scorecard)
- The ownership net value points would increase, this may result in an increase in B-BBEE status level;
- The increase in net value points may result in meeting the 40% sub-minimum for the net value priority element. The elimination of a level discount will result in an increase in points and the B-BBEE status level;
- The increase in net value points may result in the achievement of the full net value points and in cases the achievement of all the criteria for recognition as a “51% Black Owned Status”
- Parties have a greater appreciation for the underlying value of having an investment with no risk.
- Lower downside risk has a high enough value and could lock in the 10% value on first year deals.
- Transactions may not require upfront discounts.
- The measured entity can utilise this valuation to account for IFRS 2 costs.