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Patenting and Prototyping, what do I need to know?

Developing and protecting your products.

Entrepreneur

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Prototypes and the Final Product

What is a prototype?

A prototype is a three-dimensional version of your vision. One of the essential early steps in the inventing process is creating a prototype. Simply defined, it is a three-dimensional version of your vision. But what exactly should a prototype look like? Firstly, it depends on your idea. Secondly, it depends on your budget and your goals. If possible, it’s great to start with a handmade prototype, no matter how rudimentary.

We have seen prototypes made from the simplest of household items: socks, nappy tabs, household glue, and empty milk containers – you name it. If it works for your initial demonstration purposes, it’s as good as the most expensive materials.

Developing the Product

You can grow without new products, but most small companies will find it difficult to grow at all, much less rapidly, without a constant stream of new products that meet customer needs. If you decide to develop new products as part of your growth plan, you’re in good company. Small companies like yours contribute a sizeable amount of the major industrial innovations occurring in South Africa (and at least half in the USA).

At the same time, approximately one-third of all new products are unsuccessful, and in some industries the percentage of failures is much higher. The way to increase your chances of coming up with good ideas is to follow the tested track to new product development success.

The Five Stages of Developing New Products

New product development can be described as a five-stage process, beginning with generating ideas and progressing to marketing completed products. In between are processes where you evaluate and screen product ideas, take steps to protect your ideas, and finalise design in a research and development (R&D) stage. Following are details on each stage:

1. Generating ideas

Generating ideas consists of two parts: creating an idea and developing it for commercial sale. There are many good techniques for idea creation, including brainstorming, random association and even daydreaming. You may want to generate a long list of ideas and then whittle them down to a very few that appear to have commercial appeal.

2. Evaluating and screening product ideas

Everybody likes their own ideas, but that doesn’t mean others will. When you are evaluating ideas for their potential, it’s important to get objective opinions. For help with technical issues, many companies take their ideas to testing laboratories, engineering consultants, product development firms, and university and college technical testing services. When it comes to evaluating an idea’s commercial potential, many entrepreneurs use the Preliminary Innovation Evaluation System (PIES) technique. This is a formal methodology for assessing the commercial potential of inventions and innovations.

3. Protecting your ideas

If you think you have come up with a valuable idea for a new product, you should take steps to protect it. Most people who want to protect ideas think first of patents. There are good reasons for this. For one thing, you will find it difficult to license your idea to other companies, should you wish to do so, without patent protection. However, getting a patent is a lengthy, complicated process, and one you shouldn’t embark on without professional help; this makes the process expensive.

If you wish to pursue a patent for your ideas, contact a registered patent attorney or patent agent. Many firms choose to protect ideas using trade secrecy. This is simply a matter of keeping knowledge of your ideas, designs, processes, techniques or any other unique component of your creation limited to yourself or a small group of people.

Most trade secrets are in the areas of chemical formulas, factory equipment, and machines and manufacturing processes. The formula for Coca-Cola is one of the best recognised and most successful trade secrets.

4. Finalising design research and development

Research and development (R&D) is necessary for refining most designs for new products and services. As the owner of a growing company, you are in a good position when it comes to this stage. Most independent inventors don’t have the resources to pay for this costly and often protracted stage of product introduction.

Most lenders and investors are trapped by a catch-22 mentality that makes them reluctant to invest in ideas until after they prove viable in the marketplace.

If you believe in your idea, you can be the first to market. R&D consists of producing prototypes, testing them for usability and other features, and refining the design until you wind up with something you think you can make and sell for a profit. This may involve test-marketing, beta testing, analysis of marketing plans and sales projections, cost studies and more. As the last step before you commit to rolling your product out, R&D is perhaps the most important step of all.

5. Promoting and marketing your product

Now that you have a ready-for-sale product, it’s time to promote, market and distribute it. Many of the rules that apply to existing products also apply to promoting, marketing and distributing new products. However, new products have some additional wrinkles. For instance, your promotion will probably consist of a larger amount of customer education, since you will be offering them something they have never seen before.

Your marketing may have to be broader than the niche efforts you have used in the past because, odds are, you’ll be a little unsure about the actual market out there. Finally, you may need to test some completely new distribution channels until you find the right place to sell your product.

Understanding the Patent

Protecting your invention through a patent.

Generating great ideas is rarely a problem, but launching them in a timely way can be a challenge. First you will need to develop a business plan outlining all your ideas. There are organisations that can help you optimise the research and development (R&D) cycle, help with marketing, operations and finance, but these services come at a fee. An expert is the best to write the plan for and with you. Deciding whom to approach depends on what kind of invention or idea you have.

Another option is to find a committed partner whose strength lies in marketing. Taking a partner on board with the right marketing expertise is a good alternative. Again, this can create a completely new set of problems, as a partner must be right for you and your products.

Protect Your Ideas

Before you even attempt to market the product, register a patent. A patent is an official document securing to an inventor, for a period of time, the exclusive right to make, use, or sell an invention. Before you can register a patent, you have to find out if the idea or invention has been registered before. In order to do this you have to conduct a patent search. You can do this, or if you can afford it, it is best to conduct a search with the help of a patent attorney.

Protect your Intellectual Property

The first step to take is to patent the product. This is how you will protect your Intellectual Property. A patent is an exclusive right granted for an invention, or offers a new technical solution to a problem.

In South Africa, the intellectual property division of CIPRO, (Companies and Intellectual Property Registration Office), is responsible for the registration of patents, trademarks, designs and copyright. Patent searches in other countries are a little easier than in South Africa as the patent records of numerous countries are available on-line in specialist databases, while the South African system is manual and paper based.

South African Patent Searches

“Most patent attorneys in South Africa use USAPTO to conduct their searches. This site offers a good indication of whether or not an invention has been patented because the “novelty requirement” is truly tested in such a large market place. Most patent application will be granted by Cipro because they do not check to establish that an invention is unique. That is why a Provisional Application for Patent is so important.

Step 1:

In South Africa, a patent search can only be done at CIPRO and is located in Pretoria. Researchers and inventors can do searches at CIPRO’s Paper Based Disclosure Centre. South African patents are not available online.

Step 2:

Once you have established that the patent hasn’t been registered you can file a provisional patent application. The reason that you register a provisional patent application is to provide time to evaluate the invention publically. This means that if a similar or the same patent is registered, but was missed during the search, there would be a 12-month period for this problem to show up.
Applications for Provisional Patent Application costs R60.

Step 3:

Once the provisional patent application has expired, a patent application must be completed. Complete patents must be signed and filed by a patent attorney. The complete patent filing in South Africa, which can cost between R7 000 and R10 000 or more, including official fees. The renewal fee, payable annually from the 3rd year onwards, is on a sliding scale from R130 to R206 for official fees and R725 for a patent attorney’s fee.

Other search options:

There is an Electronic Patent Journal (EPJ) where South African patent information is available. It is currently being developed for availability via the Internet, but at present can only be accessed through the offices of the patent attorneys, Hahn & Hahn and Spoor & Fisher. The database is available on CD or hard disk at a cost of R55 000 for the basic set and R12 370 per annum for the update. There is also an option for ‘pay-as-you-use’ searches. An hourly fee is charged.

International Patent Searches

Patent searches in other countries in other industrialised countries are available on-line in specialist databases.

  • USPTO: Contains US granted patents and US applications published after 15 March 2001
  • EPO: This is the Official European Patent Office database. Contains over 30 million published patents world wide
  • Alphapatent: For quick and easy downloading of published US, PCT, EP and JP applications and patents
  • WIPO: Contains published PCT applications. This is the most probable site where new inventions will first be published.
  • AUS: Contains published AU patents and applications
  • EEVL: Contains the full text of over 250 engineering, mathematics and computing journalsUK Designs: Contains designs that can be viewed showing 128 images at a time

Freeserve: Contains status information for various patents

How long is a patent valid?

Patent protection is granted for a limited period. Patent protection means that the invention cannot be commercially made, used, distributed or sold without the patent holder’s consent. A patent can last up to 20 years, provided that it is renewed annually from the third year.

Organisations that can help you

As an inventor or designer or if you need to protect an idea following fields.

  • Intellectual Property protection
  • Technical, product design and development
  • Business planning, marketing advice and obtaining venture capital

These organisations will be able to help you depending on the nature of the idea or invention:

  • MyPatent
  • Tshwane University of Technology
  • Technology Station in Chemicals
  • Institute for Technological Innovation (ITI)
  • Central Mechanical Services (SMD)
  • The Industrial Designers Association of South Africa (IDEASA)
  • Softstart Business & Technology Incubator (SoftstartBTI)
  • Council of Scientific and Industrial Research
  • Seda Technology Programme (STP)
  • Support Programme for Industrial Innovation (SPII)
  • The Innovation Fund Commercialisation Office
  • The Innovation Hub
  • SABS Design Institute
  • Ergotech
  • Technimark

What are the advantages of developing a ‘homemade’ prototype?

Explore all the possibilities that are on the market. Eventually, if you decide to move forward with your invention, you will probably need what’s known as a “pre-production” prototype, especially if you plan to manufacture it yourself rather than license it. But as a first step, a homemade “presentation” prototype can give you a good running start.

A prototype provides other advantages, as well

  1. It enables you to test and refine the functionality of your design. Sure, your idea works perfectly in theory. It’s not until you start physically creating it that you will encounter flaws in your thinking. That’s why another great reason to develop a prototype is to test the functionality of your idea. You will never know the design issues and challenges until you begin actually taking your idea from theory to reality.
  2. It makes it possible to test the performance of various materials. For example, your heart may be set on using metal – until you test it and realise that, say, plastic performs better at a lower cost for your particular application. The prototype stage will help you determine the best materials.
  3. It will help you describe your product more effectively with your team, including your attorney, packaging or marketing expert, engineers and potential business partners.
  4. It will encourage others to take you more seriously. When you arrive with a prototype in hand to meet any professional, from your own attorney to a potential licensing company, you separate yourself from the dozens of others who have approached them with only vague ideas in mind. Instead, you’ll be viewed as a professional with a purpose, as opposed to just an inventor with a potentially good idea.

So now that you know that creating a prototype is a vital step in your invention process, how exactly do you move forward and actually do it? This stage in the inventing process is possibly the period of greatest learning. This is where your words and thoughts change from “Can I?” to “How will I?” Making a prototype by hand is a great way to start bringing your product to life. Remember, there are no rules. Give yourself permission to experiment. Look around the house and select materials that you can use to test in order to see if your idea works.

Of course, your product could also be made from any number of materials, ranging from metals to chemicals to textiles. When using any material, try to be open to alternatives you may not have originally considered. For example, you may be convinced that you want to use cotton. If this is the case, challenge yourself by asking yourself why. Perhaps another material might work better, such as a stretch material like Lycra. Or how about using mesh, canvas, nylon or leather? What about taking a leap and trying Neoprene? This is the time to say “What if” and allow yourself the freedom to explore. Put aside your original thoughts – you may end up coming back to them, but at least then you’ll know you have made the best decision.

Once you have developed your prototype as far as you reasonably can, it’s time to consider hiring a professional to help you with the next steps. There are many avenues you can take at this stage.

You may wish to hire professional prototype developers, engineers and designers, but others may be able to help you as well, including a handyman, a machinist or a student from a local industrial design college. The complexity and materials to be used in your specific product will help drive this decision.

Your budget may also be a consideration – a handyman or machinist, for example, will probably charge much less per hour than an engineer, and their services may be perfectly sufficient if your design is relatively straightforward. The prototyping stage is a great time to use all your untapped creative ability and to explore all the possibilities that are on the market.

Don’t limit yourself to any preconceived notions, be it material use or the types of professionals you can consult, and explore as much as you can as you begin bringing your product idea to life.

How to find a company to build a prototype unit once a patent is registered

Start by contacting the SABS Design Institute which is part of the South African Bureau of Standards (SABS) in Pretoria.

Getting the basic concept built

Once you have discussed the basic concept of your invention and that you need to build a prototype, The Design Institute will advise you from there on.

“We have many organisations that can help you build a prototype, many of which are linked to Universities. In order to protect your idea and product you’ll have to sign a confidentiality agreement with us before anything can be done”, explains Design Development Advisor at the SABS Design Institute, Bongani Ntombela. In fact, if the invention is good, everything will fall into place, from funding to mentorship. The Design Institute will refer you to the Dti (Department of Trade and Industry) who will assist you to take the project through all the necessary stages to get it into the market place” says Ntombela.

In this way you will be able to control the development and commercialisation of your idea.  The first prototype is a model that enables you to get a better feel for the basic premise of your invention. After the first prototype is built, a working prototype if often made in order for users to try out some or all of the features of the invention. Stage three is the final prototype which is a model that looks and functions almost like a manufactured product.

Make sure you are ready

Before you approach the SABS Design Institute prepare yourself properly and do the following:

  • Write a description of what the invention will do.
  • Make a list of the most important features.
  • Draw a picture of how it will look.
  • Build a model any way you can (on the cheap –just to give them a better idea)

Benefits of prototyping:

  • A prototype is impressive and provides investors or companies with a more graphic presentation.
  • A working prototype demonstrates that the idea is developed and therefore often means the inventors can ask for higher royalty payments.
  • A prototype gets you closer to manufacturing the idea yourself.
  • Prototyping shows people you are serious about the idea.

How important is quality to a small business and how does one address quality of products in a small business?

Quality products are the key to success for any small business. The basic goal of quality control is to ensure that the products, services, or processes provided meet specific requirements and are dependable, satisfactory, and fiscally sound. The goal of a quality control team is to identify products or services that do not meet a company’s specified standards of quality.

Under traditional quality control, inspection of products and services (checking to make sure that what’s being produced is meeting the required standard) takes place during and at the end of the operations process.

The question of whether or not quality should be sacrificed to cut costs is one that many business owners ask themselves. However, this strategy is counter-productive and short-sighted as it costs the business its reputation. Without a good reputation, the business is set to fail.

If you feel the price of your products or service is high, rather than compromise on quality, find a way to add value to the product. This can be done by offering better and longer guarantee terms, personalised service or free options depending on the product

Contacts

 

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

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Doing Business in SA

Free Payslip And Contract Of Employment Template Download

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

Menét Hamel

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In your downloads you will find the following resources below:

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.

Related: 5 Ways to Make Your Payroll & HR Solution Pay for Itself


Download your payslip template 

When launching your business you don’t want to be blindsided by the little but impactful costs, like PAYE or UIF. Ensure you have everything covered by using this payslip template.


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.


Download your contract of employment template

When employing staff you should ensure the contract is legal and legally binding. Customise this contract of employment to suit your business and what you can offer your employees.


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

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Doing Business in SA

What steps do I need to take to start manufacturing toilet paper?

This comprehensive guide takes you through everything you need to know to start a toilet paper business.

Entrepreneur

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The business of producing toilet paper has been recognised as one of the fastest developing assembling commercial initiatives in Africa.

Toilet paper is used in our homes, work places, schools, hotels, restaurants, shops, maternity homes, hospitals, churches, clubs and many others. It can be used in various other ways such as cleaning up messes and decoration.

The difference between toilet paper and other tissues is that it is created to breakdown in septic tanks and other tissues don’t necessarily do this.

We recommend: What steps do I need to take to start manufacturing toilet paper?

To start and run a business, it is not enough just to have a good, viable idea. You also need to have the right skills, attitude and personality to make the enterprise succeed.

Benefits of starting a toilet paper production business

  • It has a simple production procedures
  • There are not many product offerings or varieties
  • Simple organisational involved
  • High interest on the product
  • Easy to market
  • Product is a primary necessity in society.

Possible challenges of starting a toilet paper production business

problems-with-making-toilet-paper

  • The biggest constraint will be the insufficient amount of planted trees. This will affect you as this is where you will harvest your raw materials from. This can result in a reduction of plantation productivity. According to the Paper Manufacturers Association of South Africa 60% of all plantation trees are planted and grown especially for pulp and paper production.
  • You will need to apply for water permits to meet the terms of the regulatory framework managing water usage. This is a long and difficult process and can limit you from achieving profitable operations.
  • Transport, labour and licence costs will have a negative impact on your ability to competitively trade. You will need to apply cost control measures to remain competitive.

Did you know?

  • In an average public bathroom, it takes 71 separate visits to finish a single roll of toilet paper.

Financing your venture

It’s most likely that you will need finance when setting up a toilet roll production business. The toilet roll production equipment is available in South Africa and ranges for a single machine from R175 000 for the bottom end of the range model to R500 000 for a fully automated machine.

Manufacturing plants are also very large in size which means financing it will be quite expensive. You should use your capital to purchase the equipment you’ll need.

Try and save money by buying economical but high quality equipment. Once you have all your equipment find a premise that will accommodate all of it. Once that is completed then contact stores and potential clients.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

You can save money by renting or buying an inexpensive lot for your toilet paper business. You could even start in a smaller building and when you have increased your funds, upgrade your facilities into a bigger space. Make sure to take all of the costs into account when trying to finance your toilet paper business.

You’ll have to include raw material required to make the rolls. These are supplied in jumbo tissue rolls and cost from R6 600 per ton. You will also have to take into account staff.

Zhauns, a supplier of business opportunity machinery supports BEE by offering a variety of empowering programs for street vendors, unemployed and disadvantaged groups through consortiums, local and international joint ventures and has financial links which assist entrepreneurs in need of funding.

Related: Government Funding and Grants for Small Businesses

A start-up would need two-five people operate a small business of this kind. It takes about three months to set up the business and to properly train staff to operate machinery”. Zhauns offer free training when they install equipment purchased through them.

Planning

toilet-paper-stacked

Planning is always your starting point when starting a new business. There are several techniques you can use for your planning process. You can use ready and existing techniques and plans or you can use innovative techniques which will make your toilet paper business more unique.

Focus on the specifics of what you will need for your toilet paper business such as equipment, employees, property and raw materials. Making errors during the planning phase is normal. After your plan is finalised it should be flexible enough that you can add changes.

In this industry you are not just competing with local manufacturers. When you become a toilet paper business owner you have to figure out how you’re going to compete with different international manufacturers.

Speak to owners of similar businesses

The best source of information you can find about an area of business, is other toilet paper business owners. They will tell you in practical terms whether your ideas are feasible or not.

To locate similar businesses which can give you advice on any aspect of their toilet paper business, contact your local Chamber of Commerce. Shereen Crowie of Curviro Trading says: “It’s a commodity with no age restriction and no seasonal production demands.”

For support and guidance

toilet-paper-support-structure

If you are going to be a toilet paper business owner you need to have business skills, even more so than technical skills about your product or service. This means you have to understand finance.

You need to know how much your idea is going to cost you, whether it will make enough money to pay back these costs and make enough in addition to satisfy your requirements.

The DTI (Department of Trade and Industry) recognises that support in the form of advice from specialist organisations is vital and the offer support groups to SME businesses.

One such arm is Khula Enterprise Finance which is a wholesale finance institution that has well-developed ties in the public and private sectors.

Through these channels – which include commercial banks, retail financial institutions, specialist funds and joint ventures they play an effective role in order to bridge finance gaps that are not addressed by commercial financial institutions in the small business sector.

Did you know?

  • People use on average 8.6 sheets per trip, which is a total of 57 sheets per day. That’s an annual total of 20,805 sheets.

Training

It is recommended to get training when joining the toilet paper business industry. There are many essential practical skills which you will need when starting a toilet paper business.

There are courses offered by universities which will help improve your skills and understanding of the technology involved. You can alternatively get training from current experts in this field.

You can apply for internships at factories and get first-hand experience. If this is your plan of action make sure to take very detailed notes about all the process involved.

Draw up a business plan

Business plans are essential for businesses from when they start out to years later when your businesses has evolved and improved.

It becomes a guide for you and your employees to track whether your business has gone off course from the core of quality production. Experts can be hired to help you draw up a toilet paper business plan for a fee.

Business plans can be used to organise everything from your marketing strategy to the strengths and weaknesses of your business.

We recommend: Business Plan Examples to Get You Going

It will help your toilet paper business keep clear objectives as well as making your priorities recognisable. Milestones recorded in your toilet paper business plan will help you follow your progress.

Location

Choose a good location in an industrial area for your toilet paper business. It’s recommended that you get a realtor, since they are the experts in their field.

They will advise you on which buildings are better for your toilet paper business and which ones would be unsuitable.

Make enough time to view each property before purchasing or renting it. Your toilet paper business can’t be in a residential area.

Types of Machinery

toilet-paper-machinery

You will need to buy or rent the necessary equipment with the finances you have. Some of the machinery that you need to get going with your toilet paper business is:

  • Core making cutting machine – This produces the brown cardboard core that the tissue is wrapped around.
  • Jumbo reel winding machine– This winds the tissue paper from the jumbo reels to the cardboard core. It will automatically stop at a programmed size.
  • Embossment attachments or embossing machines – Embossments are the prints on the surface of the tissue and the tissue roll can either be plain or embossed.
  • Band saw cutting machine – this cuts the paper into the right side.
  • Other machinery requirements:
    • Generator for power outages
    • Auxiliary equipment
    • Transportation – its optional but can be essential.

We recommend: Where can I hire the machinery needed to manufacture toilet rolls?

Employees

This type of business will require trained employees. It would be a definite advantage if you hired experienced operators or people experienced in similar industries.

This will allow you to hit the ground running instead of slowly training your staff from scratch.

Hiring inexperienced people can also cause a decline in the quality of your production as well as a decline in the level of your toilet paper businesses productivity.

Marketing strategies

Once production has started you will need to come up with various ways of distributing your product.

Since your brand is new, you will most likely have to do a demanding marketing drive so that customers know who you are.

Customers won’t buy your brand if they don’t know who you are. Advertising consultants can help your toilet paper business with effective strategies which will help increase sales.

Which works better buying machinery first or getting orders before buying equipment?

toilet-paper-orders

Look at your market before spending the money. It is good business practice to establish if there is a market for your product before buying expensive equipment. For this reason, it is vital to do research and to prepare a business plan.

Renting manufacturing equipment for this purpose may be a solution. Once the toilet paper business is up and running you can then consider buying your own machines.

Buying outright can result in a huge drain on cash in the first year of your toilet paper business.

Did you know?

  • In South Africa a family of four uses approximately one toilet roll every 1.5 days

Example of innovative thinking

Chandaria Industries operates out of Kenya and Tanzania. They sell their products in 15 African countries.

What sets them apart from their competitors is they make their recycled toilet paper from used paper.

What innovative thinking does for them, their communities and their country:

  • They are making money from recycling
  • They are transforming waste into a necessity
  • They are now a source of national wealth
  • They provide employment for many thousands of people

Just the used paper recycling activities creates nearly 20 000 jobs. By doing this they have saved over 30 million trees since they started in 1964. They still have more room to grow, saying that they don’t get as much used paper as they need.

Expansion options

Toilet paper will always be a necessity in people’s lives. Where your toilet paper business can grow to:

  • Custom toilet paper – creating toilet paper with personalised images or custom images
  • Various sizes – You could expand your toilet paper business into various other toilet paper sizes and thicknesses
  • Various tissue paper opportunities – You can expand your business into the tissue paper manufacturing business

Paper Manufacturers Association of South Africa (Pamsa) executive director, Jane Molony says that the pulp and paper industry’s is continuing to grow and make profits because of their energy-saving initiatives.

Molony also says that the value of the pulp and paper industry (excluding forests and recycling) in 2014 was around R27.8 billion.

Tissue paper achieved a yearly turnover of R2.5 billion in 2014 which is a yearly growth of 2.7% since 2009.

This industry has large growth potential and is a great business opportunity. Toilet paper has become a basic need all across the world. It can’t be recycled so there is always need for more.

Every single person on the planet uses it on a daily basis. Why shouldn’t you be the one making it and selling it to them?

Related: Free SWOT Analysis Template

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Doing Business in SA

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.

Nicole Crampton

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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)

what-is-black-economic-empowerment

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’.

Related: The Murky Waters of BEE

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?

bbeee-advice

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.

Related: What Is BBBEE?

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.


Who Must Comply with BEE?

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.

Advantages of BEE compliance

  • 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

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.

Related: The 5 Elements Of BBBEE

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.


How to Qualify For BEE (B-BBEE)

how-to-qualify-for-bee

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.

Related: Corporate BBBEE Compliance Turned Into BBBEE Investment

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.


Understanding What Each Pillar Means

pillars-of-bbeee

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)?

broad-based-black-economic-empowerment

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.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

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?

sanas-logo

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

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.

Related: Enterprise Development Programmes For Black Entrepreneurs

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

bbeee-partnership-advice

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:

  1. Someone who can add value to your business
  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.

Related: BBEEE partnerships – what you need to know

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.

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.

Related: 10 Dynamic Black Entrepreneurs

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