Our Investment Approach

Intombazane is the ideal BEE shareholder for companies requiring legitimate, compliant BEE ownership without the risk of fronting.

It ticks all the BEE boxes and focuses on the critical objective of developing young black women into meaningful careers.

A well-structured BEE shareholder should ensure its company of all critical considerations such as real empowerment, BEE points, business benefits, costs, risk, shareholder value, sustainability and rules of an eventual exit. Intombazane and its share purchase model is structured to provide such an optimum balance for your company.

A transaction with Intombazane for a sale of just over 10% of your equity could meet the minimum requirements of the Ownership Priority Element in the BEE Scorecard ensuring that your company will not drop by a BEE level and gain between 14 and 16 points on your scorecard.

A sale of the full 25% +1 share of your equity will secure the full 25 ownership points for your company, and a sale of 30% or more of your equity will secure the full points as well as to qualify your business to be recognised as a Black Woman Owned company.

We provide a summary below to advance the discussion on the possible consideration of Intombazane. This is just a starting point for a discussion and Intombazane is open to negotiate any reasonable transaction. A final sale agreement will be based on the specific options that was agreed to.

Please also refer to the Intombazane Corporate Brochure and the ProudAfrique Working Student Program booklet. Intombazane is a key sponsor of the programme and use funding from dividends from its investments, Socio-Economic Development contributions and any other bursary or related skills development contributions and any sponsorships it can get access to. After sponsoring a few bursaries and other training programmes the decision was made that Intombazane will support our Working Student Programme as much as possible as it makes the greatest difference in the lives of youth born into poverty.

Intombazane has been through BEE verifications of its shareholding in most of its investments by separate verification companies, so we are comfortable that our approach and transaction structure is legit and acceptable. The May 2021 Practice note by the dtic ministry also confirmed that the approach of using a development trust for ownership is acceptable.

Proposed Intombazane Deal Structures

The Intombazane Structure is that the Intombazane Development Trust (IDT) holds all its new investments through a ring fenced investment company, Intombazane Holdings RF (Pty) Ltd (IH). IDT holds 100% of the shares in IH. IH would be the proposed shareholder for this transaction. The key benefit is that Intombazane can receive dividends without the deduction of the 20% dividend tax applicable in South Africa and therefore can repay its share purchase debts sooner.

There are primarily three broad directions we can propose. The options can be either a transaction based on a balance sheet related value, a transaction based on Par value or a value based on business forecast and historical and projected profit. Each has its own benefits and challenges.

We would need to take a view of the realistic 5 year business forecast for the company and test (We call this the dividend test) if the selected value basis is supported by the projected dividends expected to be paid by the company to its shareholders. The key consideration is that the shares are purchased and paid for from dividends received, so it is important that the numbers are realistic and the transaction sustainable. The calculation is heavily impacted by the dividend policy, as the higher the dividend policy, the higher the transaction value can be. It can be agreed as part of the transaction that the dividend policy is changed to a lower dividend rate once the debt has been settled. The par value option, however, alleviates the pressure on a dividend policy as there is no debt.

Balance Sheet Value option

The preferred option is usually to be able to base the value of the transaction on a reference point in the balance sheet, for example, we can consider a transaction at Net Asset Value (NAV or cumulative retained earnings plus shareholder equity) with a repurchase agreement that sets the price at such repurchase point at the level of the Net Asset Value of the company at that time. If the dividend test supports a higher value or even only a lower value, we can make a value adjustment accordingly.
We should broadly agree on a repayment plan, that is supported by the profit and dividend forecast of the company. Effectively the purchase price will be paid from annual dividends actually paid out to IH. It is important that we do not end up with a transaction that does not work simply because IH would never be able to pay for the shares from their share of dividends. If the numbers do not work, we may need to adjust the principles of the valuation to make sure we have a sustainable transaction and a fair basis for the repurchase agreement.
For the duration of the repayment period, we would typically agree that the company would declare an annual dividend based on a percentage of the NPAT of the company. IH would request that 20% of the dividends received by it will be used by IH for the benefit of its beneficiaries and expenses with the rest used to settle the loan repayment. This would stretch the repayment period a bit but allows IH to actually operate and provide its beneficiaries with immediate benefit.

A transaction based on the present value of a 5 year business forecast.

As set out in the example above, the purchase price will be paid from annual dividends actually paid out to IH. In terms of the determination of the price, financial feasibility and sustainability of the transaction, we should broadly agree on a valuation and repayment plan, but this has to be supported by the profit and dividend forecast of the company. It is important that we do not end up with a transaction that does not work simply because IH would never be able to pay for the shares from their share of dividends. If the numbers do not work, we may need to adjust the principles of the valuation to make sure we have a sustainable transaction and a fair basis for the repurchase agreement.
We would negotiate the pricing model, but it is critical that we agree on a model that would not be easy to manipulate, for example, a valuation that take a portion of its calculation based on a forecast, can be disputed if the forecast is seen to be unrealistic or unfair. There are several options that can be considered, such as a multiple of the NPAT of the prior 3 years that is weighted towards the most recent past. (Weighted could mean 3 x NPAT of the most recent financial year plus 2 x NPAT of the financial year prior to that and plus 1 x NPAT of the financial year prior to that) This is negotiable, depending on the balance of the deal offer.
For the duration of the repayment period, we would typically agree that the company would declare an annual dividend based on a percentage of the NPAT of the company. IH would request that 20% of the dividends received by it will be used by IH for the benefit of its beneficiaries and expenses with the rest used to settle the loan repayment. This would stretch the repayment period a bit but allows IH to actually operate and provide its beneficiaries with immediate benefit.

Par Value option

1. This is similar to the NAV option set out above, but for a business that does not have strong retained earnings in its balance sheet, we could consider a transaction at par value with a repurchase agreement that sets the price at such repurchase at the level of the Net Asset Value of the company (cumulative retained earnings plus shareholder equity).
2. If the transaction is done at par value or similarly low value, IH could pay the full purchase price upfront and the need for a minimum dividend is negated and the company can decide on its own dividend policy.

General Comments

1. IH would like to see a backstop in the pricing structure for the vendor financed versions that agrees that if the shares have not been paid fully after 6 – 8 years, that any outstanding debt is written off. This should only apply if the actual performance of the business was significantly worse than the forecasts.
2. The seller retains the right to repurchase the shares based on the then valid valuation or NAV of the company as the case may be. Should the shareholders or the company wish to buy its shares back at any time in the future, we simply determine the valuation as at the most recent completed month and that sets the value of the company.
3. This means that IH will only share in profits made while it is a shareholder and the repurchase price will be very low as compared to the real market value of the business. IH would obviously prefer the transaction to continue in perpetuity as its real income for its beneficiaries will only be realised after the purchase price has been settled.
4. The transaction is facilitated by Gestalt either for a flat fee or a set minimum guaranteed repurchase price. This could be as little as R20k depending on the complexity and size of the deal. Should the company elect to repurchase the shares in terms of the option clause discussed above, such purchase price would be the higher of the then current value or the purchase price to at least offer Intombazane some benefit during their participation.
5. We also need to reach agreement on any expectations that the company may have of IH. It is a critical part of the process as this is where most BEE transactions fail. The risk does not lie in the level of involvement but rather in the lack of calibration of these expectations. Basically, we need to agree upfront what is expected from IH apart from the obvious BEE benefit. At 10.1% or 15%, IH would expect to attend an annual general meeting only, with no board representation or operational involvement. At 30%, IH would expect the right to appoint a director, but we need to discuss the practicality and potential cost of this.