PRIVATE companies are favouring employee equity deals in their empowerment restructuring, a recent PricewaterhouseCoopers survey says.

Jean-Christophe Bouche, the professional services firm’s senior manager in corporate finance, says a lot of companies would ideally like to conclude an equity deal with their employee base as this is true black economic empowerment, where the employee is enfranchised.

“But this route has its difficulties — time and money are required to train employees up to senior levels of managers and directors. Private companies cannot always facilitate this.

“Hence an equity deal with employees may address the ownership element of the scorecard but not management. It is common for a trust to be set up which owns the shares, with the employees as beneficiaries. As employees are now represented through the trust on the company’s board you could find employees having access to previously confidential information. It is also important to remember that employees do not always understand that their shareholdings may only be worth something in five to 10 years, and sometimes they would prefer immediate financial rewards.”

Another route would be to bring in an external party. Bouche says private companies may choose to partner with the high-profile empowerment consortiums.

“They can bring their own benefits to the deal in terms of funding, branding and reputation. But they may not always be appropriate or add value to the business. A lesser known black economic empowerment individual or organisation could be more suitable. A third option would be to transact with a combination of both employees and an outside party.”

Bouche says many private companies are placing equity transformation at the top of the list of their empowerment efforts. While private companies are usually good at achieving black economic empowerment compliance in other elements of the scorecard — such as procurement — they need to adopt a more holistic approach and this includes addressing the equity component.

The target is that within 10 years an entity should have restructured to a 25,1% black empowerment shareholding that has both full voting and economic rights. Achieving this target may qualify the entity for 20 out of the total 100 points on the scorecard.

Bouche says that there is no ideal empowerment shareholding structure for private companies. “Each deal needs to be looked at individually,” he says.

The survey says joint ventures and partnerships are less popular. Bouche says these types of structures can be used for individual projects. “But managing them is difficult and customers of private companies might not be happy with these types of arrangements.”

Bouche recommends that when a private company is seeking a black partner it should look for several essential qualities. “They should know or understand how a private company is run. They should understand the entrepreneurial spirit underlying a private company. In addition they could have good business contacts that open up access to customers and staff. They should be individuals who can add value as shareholders and/or directors and, if possible, should have access to and commit funding.”

Bouche recommends that private companies use the services of an independent advisor and follow a proper process. “It can take between three months to a year to put together a black empowerment deal. The independent advisor can project manage the entire process, identifying possible pitfalls and providing a more objective viewpoint. Private company shareholders can sometimes be too emotionally involved. The adviser also allows the owner to remain focused on day-to-day operations during the process.”

There are various ways to finance a private company’s empowerment deal. Bouche says preferably the structure should tend towards vendor financing, where the black partner does not have sufficient funds available, as this avoids the involvement of outside parties such as banks and eliminates the risk of financiers owning some of the company in the case of default. This route is also potentially less costly but ultimately the financing structure will depend on the specific business, the parties involved and the dynamics of the deal.

Bouche says that in any black economic empowerment deal, the aim is to enhance ownership by previously disadvantaged groups, but there must be value and benefits for the existing shareholders and company.