**Net Value is a concept under the B-BBEE Ownership scorecard measuring the unencumbered shareholding in the hands of black shareholding. It is therefore critical to understand the importance of that when entering a B-BBEE deal.**

Under the generic scorecard, 8 points is allocated to Net Value under the ownership scorecard. Should a measured entity not receive a minimum of 3.2 / 8 for this indicator, it effectively means that the measured entity would be discounted with one level.

It can become a technical point, but effectively it measures the value created in the hands of black people taking into consideration variables like:

1. The debt portion coupled to the shares – if there is a debt portion, either to the measured entity itself or a third party, this will have an effect on the value creation.

2. The value of the measured entity – if this decreased since the acquisition date, this effectively means the value of the share has decreased as well. The debt(liability) portion will most like increase due to interest, and therefore your value has decreased compared to debt, and this will have a negative effect on the outcome.

The Amended Codes provide a graduation factor over 10 years to reach unencumbered black shareholding. This is depicted below:

__Example:__

If all ownership transaction was done for 25%, it effectively means that within year 1, 2.5% shareholding should be unencumbered. Let us look at a example:

Black shareholder purchases 25% in company. At time of purchase, the following variables were available:

Value of the company: R1 000 000

Value of acquisition: R250 000

Black shareholder obtained a loan from FNB.

After year 1, no repayments were made. The outcome would be (I will stipulate all three formulas as pert the Codes of Good practice):

Value of company: R1 100 000

Value of debt: R250 000

= [(R1 100 000 x 25%) – (R250 000)] / R1 100 000

= 0.023

[1] Value of black shareholders’ equity [2] Value of black shareholders debt [3] Value of measured entity

Effectively it means the value created was 2.27%. During the first year, the graduation factor is 10%. As per the formula below, it indicates that it would like an % of unencumber shareholding to be at 2.5% (10% x 25%). Therefore, to comply to the sub-minimum, 40% x 2.5% should be obtained in the Deemed net Value calculation

To evaluate whether this company complied to graduation factor:

*Formula A:*

= 0.023 x[1/(25% x 10%) x 8

= 7.36 points

*Formula B:*

= 25% / 25% x 8

= 8.00 points

Therefore the have complied to the subminimum of 3.2 points and will therefore not be discounted.

[1] Becomes Deemed net Value outcome [2] Graduation factor for the year, in this case 10% [3] Black Economic interest of 25% [4] Economic interest compliance target 25% [5] Weighting points

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