Imagine your business is, or becomes, black-owned as defined in the BEE codes. You go for that big tender, but you still don’t win it, despite your favourable empowerment credentials. Your big non-compliant competitor wins it instead.
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In the disappointment which follows you assume corruption. It is our default position in so many industries. Rampant corruption is the one segment of our daily lives which knows no colour. It is the one real equal opportunity activity in South Africa.
But not all tenders fall to corruption. There are businesses of all hues, tones, and grey scales which do not win tenders. Are all winning competitors corrupt? Probably not. What if they have other strengths with which to bargain?
This is where vanilla black ownership fails in the BEE race for sales. For instance, many tenders go the way of the supplier who is able to offer very favourable payment terms. “Look you have a very poor scorecard, but we’ll give you the business if you agree to no deposit and 90 days payment. From statement.” It is the pain that some non-compliant businesses take.
Poor BEE level businesses have to win contracts with other strengths. If the business has big reserves. Or if it can back the terms off on its own suppliers. Or if it is in its own exclusive and strong niche. These are all gaps for contract winning strategies.
BEE imperatives aside, financing customers with long payment terms remains risky. And risk reduces value multiples.
The contract is value-defeating if it loads the customer exposure index, or if margins suffer. Value decreases if higher operational costs cannot be reduced after the contract and the inevitable project losses.
If the exposure the business has to a single contract is outside sound parameters, then key valuation indicators suffer. Valuation multiples fall. Discount rates rise. That’s ok if the profits rise in proportion to risk. Then values rise. Which is why winning tenders are often more costly to the end user. But then tender reviews become the risk. These short term gains can be very dangerous if there is no plan for life after the tender.
So the winning bidder may have financial reserves to fund the tender. He may have enough swing with his own suppliers so that they help him fund the transaction. He may be able to gain some margin in the tender.
Turnover is vanity. Profit is sanity. Cashflow is reality.
Ultimately the cash flow from the deal will work through to value. In the meantime, that promise of value will be tempered by an assessment of risks taken to gain the cash flow.