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# How to calculate the value of a going concern?

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### How to calculate the value of a going concern

When buying an existing business you will need to negotiate with the owner but it is always easiest to agree on a formula.
Standard Bank’s advice on determining the value of a business includes the following formula:

1. Net worth of the business – liquidation value of the assets minus the liabilities
2. Your present earning power – annual earnings with an equal amount of net worth (say 15%)
3. Add a reasonable annual salary for owner or manager
4. Average earnings required (item 2 plus item 3)
5. Determine the average annual net earnings of the business (net profit before owner’s salary) over the last few years
6. Extra earning power (item 5 minus item 4)
7. Ask yourself over how many years you are prepared to sacrifice the extra earning power of the business to pay for the goodwill (item 6 multiplied by item 3)
8. Final price (item 1 plus item 7)

### Get a professional valuation

It is well worth the time and expense to get a professional business valuation. An accountant or lawyer can help locate the right professional. Inexperienced sellers have a tendency to set a price before they have established the value in the real world. Valuation is based on quantifiable criteria, not the owner’s personal estimation. To avoid this mistake, get an objective third-party valuation.

### Methods

There are different approaches to valuing a small business. These include assets-based, income-based and market-based valuations.

### Asset-based valuation

This is the simplest way to value a business. Examples of tangible assets include accounts receivable, furniture and fixtures, equipment, inventory, customer contracts, vehicles, leasehold improvements, prepaid expenses (paid insurance premiums for example), franchise agreements.

If you own the real estate that your business occupies you may be better off selling it separately from the business, which means it won’t be part of this valuation. However, if the business is dependent on the current location, then add the value of the real estate in this step.

### Income-based valuation

The income-based approach determines the value of a business based on its ability to generate desired economic benefit for the owners. The key objective of the income-based method is to determine the business value based on income statements. Some valuators prefer to use the company’s income before depreciation, interest and tax while others do not. Much depends on the type of business that is for sale.

### Market-based valuation

The market approach based valuation method is based primarily on the market price for similar businesses at a given point in time.

### Preparation for sale

First impressions make a big difference. Before buyers come to see the business make sure the offices are neat and clean. Remove any unnecessary clutter. Shred old documents. Replace worn out and broken furniture. Update signage.

### Confidentiality is important

If the word gets out that your business is on the market, it could adversely affect sales and your relationship with your staff. A good broker will know how to simultaneously market your business and maintain strict confidentiality. Consider your employees. Decide how and when you will communicate the sale with your employees.

Tips

• Update your company’s financial statements
• Buyers will typically require 2 to 3 years of financial statements (profit-and-loss statements, balance sheets and/or tax returns) for their evaluation.
• Make sure you have supporting documentation for nonoperational expenses (fringe benefits such as your personal health insurance).
• Prepare a simple list of the business’s important furniture, fixtures and equipment.
• Clean-up your accounts payable and any pending legal, employee or environmental issues.
• Organise your legal paperwork such as operating licenses, property leases, customer agreements and insurance documents.

### How to calculate the goodwill equation

The intangible known as ‘goodwill’ is a key consideration in a business’s value. Goodwill may range from a long-established distribution network to a sterling market reputation. And sometimes a buyer will pay top dollar to obtain a business with great goodwill. While there is much talk of goodwill when businesses exchange ownership, but the concept can be vague in some people’s minds so it’s something you need to discuss.

Generally speaking, goodwill can be calculated by working out the difference between the book value of the assets (equipment and stock) and the selling price of the business. Make sure you check the stock and all the assets and don’t take on anything that is damaged. You will need to do a stock take again on the day you take over the business to determine whether there is any discrepancy between the amount of stock agreed upon when the purchasing price was decided and what you are actually getting.

### How do you value a business owning only ‘Intellectual Property’?

The approach to valuing intellectual property depends on the specific circumstances and type of intellectual property to be valued.

We value a business on the same basis that we value any other asset such as a building or a machine, and we would look at four approaches, market price, historical cost, replacement cost and income stream,” explains Faan Wolvaardt Trademark Manager at Bowman Gilfillan.

“In terms of market price, it would be difficult to attach a value as there probably isn’t enough comparable information. Historical cost would also be problematic especially if it’s a trademark. When trying to determine value measured against replacement costs this method would also be difficult as the cost and the value are not the same,” Wolvaardt says.

### Preferred method

The income stream valuation is the preferred method if we are dealing with trademarks. This value would be based on the future economic benefits produced by the intellectual property. “We can accept that the value of the trademark equates to the amount that the trademark proprietor would have paid in royalties if the proprietor didn’t own the trademark. The calculation revolves around turnover, royalty rate and the expected life of the brand and that gives the future income stream”, explains Wolvaardt.

### Current and future money

The future income can be converted into current money by means of a standard net present value (NPV) calculation. In finance, the net present value (NPV) or net present worth (NPW) is a standard method for using the time value of money to appraise long-term projects. Valuation is not a science, but an external judgment.

Because of the increasing importance of intellectual property in a company’s valuation, turning ideas and innovation into profit is, and will continue to be, one of the biggest challenges facing business.

### What is meant by the term ‘acquisition’?

There’s only one real way to achieve massive growth literally overnight, and that’s by buying somebody else’s company. Acquisition has become one of the most popular ways to grow today. Since 1990, the annual number of mergers and acquisitions has doubled, meaning that this is the most popular era ever for growth by acquisition.

Companies choose to grow by acquiring others to increase market share, to gain access to promising new technologies, to achieve synergies in their operations, to tap well-developed distribution channels, to obtain control of undervalued assets, and a myriad other reasons.

### Risk

But acquisition can be risky because many things can go wrong with even a well-laid plan to grow by acquiring: cultures may clash, key employees may leave, synergies may fail to emerge, assets may be less valuable than perceived, and costs may skyrocket rather than fall. Still, perhaps because of the appeal of instant growth, acquisition is an increasingly common way to expand.

### What is the next step after agreeing to a purchase price?

Once you have agreed on a purchasing price, draft a letter of intent. It’s also a good idea to consult with various professionals at this point. Attorneys, tax experts and accountants will all be able to offer expert advice and raise any red flags. Finally, work out the payment terms and bear in mind that paying everything upfront leaves you little room for comeback if problems arise, as well as negatively affecting your cash flow.

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Download your free payslip and contract of employment here to get you started in the right direction.

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1. A free payslip template with formula on how to calculate tax (PAYE), UIF, etc for a start-up business.
2. A standard contract of employment (template) that complies with all the relevant laws.

The payslip template is merely an example and should you need to have anything checked in terms of your remuneration structure, we can put them in contact with our remuneration specialists in Johannesburg, Tax Consulting.

Similarly, the permanent contract of employment should be read carefully and changes should be made in line with the offer of employment and the company policies and procedures. Please note the template provided is for a permanent placement.

Related: How the Right Technology Makes DIY Payroll As Easy As 1-2-3

# How Do I Become B-BBEE Compliant?

BEE (B-BBEE) is an important part of doing business in South Africa so its best that you understand every aspect about it. Use this comprehensive guide to ensure your business is compliant and performing at its best.

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## Content in this guide

• What Is Black Economic empowerment (BEE)
• Why Is BEE Referred To As B-BBEE?
• Who Must Comply With BEE?
• Legislation
• How To Qualify For BEE
• Understanding What Each Pillar Means
• What Are Codes Of Good Practice For Broad-Based Black Economic Empowerment?
• Levels (Of Compliance)
• What Is SANAS?
• Rating Process
• What To Look For In A B-BBEE Partner

## What is Black Economic empowerment (BEE)

Black Economic Empowerment (BEE) is a government initiative aimed at increasing equity and uplifting black business owners, stakeholders and employees. The government refers to BEE as ‘positive discrimination’.

BEE is the process by which previously disadvantaged South Africans have been empowered through the transfer of ownership. Compliance with BEE principles are regulated by Codes, which provide details on how BEE should be implemented.

## Why is BEE referred to as BBBEE?

When Black Employment Equity (BEE) was first implemented in the nineties, there was no coherent strategy towards its implementation. When the South African Government gazetted updated Codes of Good Practice at the beginning of 2007, it made the implementation of Black Economic Empowerment (BEE) a legal reality.

Even though most think of Black Employment Equity as BEE, as the process was refined, its name changed to Broad-Based Black Employment Equity (B-BBEE) in order to encompass not just Blacks, but Coloured, Indians and the Chinese populations of South Africa.

Related: What Is BBBEE?

## Who Must Comply with BEE?

Size is relevant in determining the levels of B-BBEE compliance. All organs of state, public entities and any private enterprise that undertakes business with a public entity must implement the Codes.

Any business providing goods or services to another business that is subject to BEE (B-BBEE) compliance may also need to provide evidence of its own BEE (B-BBEE) compliance.

The size of your business is significant in determining the required levels of BEE (B-BBEE) compliance. The Codes provide for three levels of compliance based on the size of your business:

• Exempted Micro Enterprises (EMEs), which are businesses with an annual turnover of less than R10 million. This is a new amendment, EMEs were previously businesses with an annual turnover of less than R300 000 and less than five staff members.
• Qualifying Small Enterprises (QSEs), which are businesses with an annual turnover of between R10 to R50 million.
• Medium to large enterprises (M&Ls), which are businesses with an annual turnover of more than R50 million.

• Allows participation in the formal South African economy
• Companies will favour you as a client, particularly those aiming to acquire at least 50% of annual procurement from companies with BEE (B-BBEE) certificates.
• Able to bid for Government tenders, apply for licences, get permits and are favourably considered for procurements by the Public Sector and all BEE (B-BBEE) verified enterprises.
• Have access to tax incentives and financial grants, specifically aimed at the BEE (B-BBEE) programme.
• Avoid long questionnaires relating to BEE (B-BBEE) when tendering for a contract.

## Legislation Governing B-BBEE

There are three important pieces of legislation that control B-BBEE, namely:

### Employment Equity Act (1998)

The Employment Equity Act applies to black people, all women and disabled people, in addition, stipulates the requirements for affirmative action to ensure that qualified people from these groups are equitably represented in all occupational categories and levels of a company.

The Act is binding on any business that employs 50 or more staff, or that has an annual turnover of more than R2 million to R25 million (depending on the industry in which you operate).

### Skills Development Act (1998) and Skills Development Levy Act (1999)

These provide a framework for improving the skills and employment prospects of black people.

These Acts also make it compulsory for certain employers to contribute a percentage of their payroll (known as the Skills Development Levy) to a fund that can be used to train staff. The current generic B-BBEE scorecard awards points for skills development, but only for that which is over and above the payment of this levy.

### Preferential Procurement Policy Framework Act (2000)

This allows any State entity to give preference to black people when awarding contracts. It also aims to boost SME development, create new jobs and promote local enterprises in specific provinces. Currently, the regulations of this Act are based largely on ownership, but this is likely to be revised in order to align it with the B-BBEE Act and Codes.

Related: The 5 Elements Of BBBEE

## How to Qualify For BEE (B-BBEE)

There are four steps you’ll need to take to ensure you qualify for BEE (B-BBEE), including:

### Step 1 – Select Your Company’s Annual Turnover

The size of your business is significant in determining the required levels of BEE (B-BBEE) compliance. The Codes provide for three levels of compliance based on the size of your business:

Exempted Micro Enterprises (EMEs), which are businesses with an annual turnover of less than R10 million. This is a new amendment, EMEs were previously businesses with an annual turnover of less than R300 000 and less than five staff members.

Qualifying Small Enterprises (QSEs), which are businesses with an annual turnover between R10 to R50 million.

Medium to large enterprises (M&Ls), are businesses with an annual turnover of more than R50 million.

### Step 2 – Match the Turnover to the Scorecard

EMEs are exempt. However, these businesses will automatically receive a level associated with its percentage of black ownership, such as:

 Black ownership BEE (B-BBEE) Status Level Procurement Recognition 100% Black Owned EME Level 1 135% >50% Black Owned EME Level 2 125% <50% Black Owned EME Level 4 100%

The annual turnover must be verified by an accredited accountant, auditor or rating agency.

QSE’s used to be able to choose four out of the seven BEE Scorecard elements to score their points. However, from 2014, QSEs must comply with all 5 elements of the revised BEE (B-BBEE) Scorecard to score their points.

M&L must comply with all 5 elements of the revised BEE (B-BBEE) Scorecard to score their points.

### Step 3 – Determine the Number of Pillars Required For Your Scorecard

The five pillars of B-BBEE are:

1. Ownership (Direct empowerment)
2. Management Control (Indirect empowerment)
3. Skills Development
4. Enterprise Development
5. Socio-Economic Development.

### Step 4 – Select the Pillars For Your Scorecard

Each of the pillars is worth a certain ‘weight’ in its contribution to B-BBEE compliance. The pillars contribute to overall compliance as follows:

• Ownership                25%
• Management                19%
• Skills Development            20%
• Enterprise Development        40%
• Socio-Economic Development     5%.

Ownership, skills development and enterprise development are now considered priority pillars and a minimum of 40% compliance is mandatory, in order to achieve level 1 B-BBEE.

Related: Corporate BBBEE Compliance Turned Into BBBEE Investment

## Understanding What Each Pillar Means

It is important to understand the requirements of each pillar.

### Ownership (counts 25 points)

When determining the level of black ownership, a business will score points based on the
following:

• The extent to which black people can influence the strategic direction of the business through their shareholding
• The current net value of their shares
• The amount of profit (percentage of each Rand) that accrues to all of these black shareholders.
• Whether these shares are paid for in full, or will be within 10 years or less.
• Bonus points are awarded if any of the black shareholders are new entrants (who have not previously benefited from a B-BBEE deal)

### Management (counts 19 points)

This refers to the proportion of black people who control the direction of the business as well as those in top management who control day-to-day operations.

### Skills Development (counts 20 points)

Skills development measures a business’s investment in the training and development of black employees. Only specific types of learning programmes and learnerships qualify when claiming points on the skills development scorecard.

### Enterprise Development (counts 40 points)

If the business offers support programmes, then you can claim points on the scorecard. For example, if you donate a vehicle to one of your black company drivers so that he or she can start a delivery company, you qualify.

### Socio-Economic Development (counts 5 points)

Companies that spend at least 1% of net profits after tax (NPAT) on Social-Economic Development (SED) are eligible for 5 points under this pillar.

Social-Economic Development (SED), however, is not Corporate Social Investment (CSI). SED’s criteria demands that those being assisted gain long-term access to the economy and receive a lasting benefit. According to the definition in the legislature, any initiative should “facilitate income-generating activities”.

## What Are Codes of Good Practice For Broad-Based Black Economic Empowerment (B-BBEE)?

The Codes of Good Practice refers to options that businesses can use in order to evaluate and track their B-BBEE efforts. Within the new B-BBEE regulations companies must meet specific targets. The codes are there to guide businesses into receiving an accurate rating, which it can include on the company profile.

The Codes of Good Practice are legally binding on all state and state-owned entities. These businesses have 10 years to reach this target, which means government will have to use the Codes to measure its B-BBEE compliance when choosing suppliers, granting licences or making concessions. The cascade effect of this focus on B-BBEE compliant companies is that non-compliant businesses will find it hard to grow or maintain their level of business success within South Africa.

On the other hand, private companies will also need to apply the codes if they want to do business with any government enterprise – in order to tender for business, apply for licences and concessions, enter into public-private partnerships or buy state-owned assets.

The Act is broken up into nine Subsections.

• Code 000: Framework for Measuring Broad-Based Black Economic Empowerment
• Code 100: Measurement of the Ownership Element
• Code 200: Measurement of the Management Control Element
• Code 300: Measurement of the Employment Element
• Code 400: Measurement of the Skills Development Element
• Code 500: Measurement of the Preferential Procurement Element
• Code 600: Measurement of the Enterprise Development Element
• Code 700: Measurement of the Socio-Economic Development Element
• Code 800: Measurement of Qualifying Small Enterprises.

### Sector Codes Are an Extension of Codes of Good Practice

Companies must also be aware of Sector Codes, which are an extension of the Codes, but apply within a specified industry sector only. For example, there is a Construction Sector Code (a new draft to appear in 2017), a Property Sector Code, Financial Sector Code and Tourism Sector Code. Sector codes are industry-specific interventions and measures driven by major stakeholders in industries where the codes are developed.

## Levels (Of Compliance)

 B-BBEE Contribution Level “Old” Scorecard Points Amended Scorecard Points B-BBEE Procurement Recognition Level 1 ≥100 points ≥100 points 135% 2 ≥ 85 but < 100 ≥ 95 but < 100 125% 3 ≥ 75 but < 85 ≥ 90 but < 95 110% 4 ≥ 65 but < 75 ≥ 80 but < 90 100% 5 ≥ 55 but < 65 ≥ 75 but < 80 80% 6 ≥ 45 but < 55 ≥ 70 but < 75 60% 7 ≥ 40 but <45 ≥ 55 but <70 50% 8 ≥ 30 but < 40 ≥ 40 but < 55 10% Non-Compliant < 30 < 40 0%

Customers (public and private) will prefer to interact and procure from companies with higher B-BBEE status (for its own recognition), level 1 being the ultimate goal. These are the current B-BBEE status levels:

## What Is SANAS?

The South African National Accreditation System (SANAS) is recognised by the South African Government as the single National Accreditation Body that gives formal B-BBEE recognition. A B-BBEE Certificate can be issued by any Verification Agency so long as they are approved to do so by SANAS. The Certificate can only be issued once a full verification has been performed and the documentation presented by your company has been verified. SANAS certificates are a formal recognition that an organisation is competent to perform specific tasks.

Related: Three Things You Need To Know About BBBEE Now

Ratings Agencies must perform the assessments strictly according to the guidelines set out by the Department of Trade and Industry (DTI). On successful completion it will issue a certificate with the Level (1-9) of BEE (B-BBEE) compliance appropriate to your enterprise.

• A certificate will be issued, which is relevant to all companies requesting it.
• B-BBEE must be validated by a SANAS accredited verification agency.
• Self-accreditation is no longer recognised or accepted.

## B-BBEE Rating Process

The rating process only applies to QSEs and M&L’s:

### Step 1: Application, Approval and Payment

• Measured Entity (ME) requests an Application Form
• Client Manager sends Application Form to ME
• ME completes and returns Application Form to Client Manager
• Client Manager sends Application Form to Verifications Manager
• Verifications Manager reviews and approves application against prescribed criteria.
• Client Manager sends Quotation and/or Invoice to ME.
• ME approves quote and pays commitment fee (65% of quoted/Invoiced amount).

### Step 2: Pre-site Visit and Legal Processes

• Client Manager prepares and sends SLA and other contracts for signature by ME
• Lead Analyst visits ME for a briefing, to explain the verification process and to agree on Verification Plan, Team and deadlines.
• ME prepares all required documents and sends them to Client Manager.
• Client Manager signs-off Document Register acknowledging receipt and hands documents over to Lead Analyst.

### Step 3: Analysis, Site visit, Reporting and Certification

• Lead Analyst performs a basic analysis and measures entity against scorecard.
• Lead Analyst visits ME on site for Verification as agreed on Verification Plan.
• Lead Analyst prepares Verification Report and Recommendation for Verifications Manager.
• Verifications Manager performs Vertical Assessment and Quality Assurance on report and then approves recommendation report.
• Client Manager sends Verification Report and Rating to ME for approval.
• ME approves Verification Report and Rating.
• Verifications Manager issues a Rating Certificate and Final Report.
• Client Manager sends Rating Certificate and Final Report to ME.

### Who Should Manage B-BBEE Processes In a Business?

The best way to structure the management process is as follows:

• Chief Executive Officer – Ownership and Management Control
• Chief Financial Officer – Preferential Procurement and Enterprise Development
• Employment Equity Committee – Socio-economic Development, Skills Development and Employment Equity.

The Employment Equity Committee needs training, as they are likely to have limited experience in making strategic recommendations to the CEO on these issues. The CEO should sit in the Employment Equity Committee along with someone with HR experience.

### Did You Know?

Unlike State-owned entities, private companies are free to develop their own procurement policies, which may include different criteria and different weightings to that of the generic B-BBEE scorecard.

## What to Look For In a B-BBEE Partner

When looking for a new partner, specifically for B-BBEE, companies arguably rush through the process. This could leave your business open to having two unaligned partners at the top, trying to force the business into opposite directions, thinking that they each know what’s right for the company.

Every successful business partnership needs three things:

2. Operate in a growing industry
3. Bringing additional finances or resources to the table.

A good partnership won’t happen overnight; it could take you up to 18 months to work out the details with your new B-BBEE partner. So, using it as an eleventh-hour attempt to save your business or when there’s a big tender on the line, might not work out for you.

To be successful, it’s better to go into this process with the right motives. A great B-BBEE partnership is mutually beneficial and based on growth potential for all involved.

Related: BBEEE partnerships – what you need to know

### Align Vision and Values

Partner with someone who shares your vision and values in business. Both partners need to be clear on their roles within the business and what they will need to contribute towards the business. Like all great partnerships, a B-BBEE partnership is also built on alignment.

You want a partner who will bring critical skills, experience, knowledge or maybe resources to the table. Having a partner who is only fronting can damage your business’ reputation. Fronting is when you have a partner in name only in order to qualify for a higher B-BBEE level.

### Searching For the Right Partner

Networking in the wrong environment can be detrimental, just like networking in the right environment can be advantageous to you and your business.

Ask people you trust for advice or if they know someone who is compatible with you and your work style. You’ll need to approach this as a long-term endeavour as it takes time to find the right person.

Once you’ve found your new partner, structure the best deal possible through a top notch legal team. This will protect both parties if the partnership doesn’t work out. Include roles and responsibilities within the contract, so everyone is accountable, and knows what will result should the endeavour fail.

# What You Need To Know About Sole Proprietor vs. Independent Contractor

South African tax specialist, Kobus Muller of Muller Accountants, breaks down sole proprietors vs. independent contractors to assist you with doing business in South Africa.

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When considering Sole Proprietorship versus Independent Contractorship – you need to be asking yourself the following questions:

1. Is there a difference between a Sole Proprietor and an Independent Contractor, with regards to how a Company deals with such a person who works on a specific project as far as contracts and SARS are concerned?

2. An IRP5 must be issued to an Independent Contractor (Code 3616 – Income); does this apply to a Sole Proprietor as well?

3. Also is there a difference in the types of expenses that these two “entities” can claim on their tax returns?

To answer these questions, the term sole proprietor and independent contractor must be understood.

We recommend: Don’t Forget to Claim Qualifying Tax Deductions

For South African Income Tax purposes the following apply:

## A sole proprietor

A sole proprietor, also known as the sole trader is a type of business entity that is owned and run by one natural person and in which there is no legal distinction between the owner and the business. The owner is in direct control of all elements and is legally accountable for the finances of such business and this may include debts, loans, loss etc.

The owner receives all profits of the business and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor’s.

The sole proprietor is taxed on his/her profit (Income less tax deductable expenses) at the applicable tax rate for individuals.

## Independent contractor

For SARS’s’ purposes an independent contractor is someone that renders a service to another company, employer and who;

• employs three or more full-time employees, who are not connected persons in relation to him or her ( family members ect) and are engaged in his or her business throughout the particular tax year
• does not have to performed his/her service mainly at the premises of the client and
• is not subject to the control of any other person as to the manner in which the worker’s duties are or will be performed, or as to the hours of work.

It these three conditions are not met such an independent contractor is deemed not to be an independent contractor and the amount so received by him or her, will be treated as a “salary” from which employees tax must be deducted. This “independent contractor” might be a Close Corporation, Company or a Trust, which differs from the sole proprietor.

If the above conditions are not met that CC, Pty or Trust will be taxed as an employee. When this applies and employee’s tax is not deducted, SARS will hold the company that pays such persons “salary” responsible to pay the employees tax to SARS

For such a project, if the independent contractor met the above conditions there will not be a difference between how you treat the sole proprietor/independent contractor who is conducting the work.

The sole proprietor/Independent contractor must supply you with an invoice to enable you to do the remittance.

If such a person’s turnover is more than R 1m per annum a Tax invoice (VAT) must be issued to you.

If the sole proprietor and/or the independent contractor does not meet the above three conditions an IRP5 have to be issued.

If the independent contractor or the sole proprietor meets the conditions above they can claim the same types of tax deductable expenses from their income and is taxed on the net profit (total income less deductable expenses).

We recommend: Do You Know Your Taxpayer Rights?

It is advisable to get an affidavit from a person that do the work that he/she meets the conditions above. This will saves a lot of headache when SARS should levy penalties, because you have not deducted employee’s tax for the Independent contractor.

You will notice reference is made to tax deductable expenses. It is very important to know that not all expenses are tax deductable