More and more, as we conduct valuations of businesses, we see this line item in the expenses: “Donations”. It has taken on a new meaning in our heavily BBBEE influenced way of doing business; it has become a way of easily buying some points towards becoming socially, politically and economically acceptable.
If a business services or sells to a large corporation, or one which in turn supplies a large corporation, this becomes more and more important. You’ll know if you fit into that group by whether or not someone up the food chain has called to ask about your BBBEE scorecard.
We have effectively changed an entrance fee to heaven, to something which is a charity event with a reward on this planet, now. The reward comes by way of being allowed to do business with “the club”.
So how do we treat this line item in a valuation of a business? In years gone by, a buyer would look at it as a possible addition to his own profitability, and calculate value accordingly. After all, it was almost certain that he was not going to sponsor the same mini league soccer side, or the same church as the seller. It was never anything to do with the furtherance of the business.
Now however, that line item has become more of a cost of doing business, dependant of course on whom one wishes to do business with. It is not a charity item which should be automatically taken as an extra profit item by a buyer. Your eventual buyer is looking for the best deal for himself, and he will test all these items very carefully. He will also want to keep your scorecard in place, and so will not tinker with the way you have made it work for you.
Cynically, the benefits the recipients of BEE hand outs are receiving, are the proceeds of a cruel investment their ancestors contributed to by being subjected to 300 years of brutal treatment. BEE in its various forms has had grotesque benefits for a few, and somewhat more humble benefits for some more. In many respects it has had very little, if any, benefit to the majority, and as suggested by the Institute of Race Relations, may have even damaged the prospects of a better life for us all.
- One thing which is certain; if it works for you to get more business in, then it is a cost of doing business and adds to the value of your business.
- Another thing which is probable; if you make donations because you are good guy, and not because you have to, then you will benefit when it comes time to sell your business because a buyer will be prepared to add that back to your bottom line, and therefore to the selling price in some way.
Make it work for you. Make sure you know why.
You will have to prove your numbers, and you cannot expect that a buyer will do you any favours in this respect. Getting things in order now, and getting into the habit of keeping them in order will add a few years’ resources to your retirement fund, at a relatively small investment. Understanding why you contribute those “donations” is part of the process.