Making SMME Investment Less Taxing
A new player tackling the SMME crisis, Anuva Investments, is harnessing innovative tax-deductible investment to grow small businesses. The company is looking to expand on the success it has already achieved in turning around businesses in need of a shot in the arm.
Founder and director Neill Hobbs says that following the success of its initial investments in home appliance repair company MasterCare and the formation of MasterCare Medical Supplies, the sole distributor of sports bracing and medical products for Medac, Anuva will soon be launching an energy efficiency investment initiative. Anuva is also actively looking for investments in the medical, education, security services, green technology, agro-processing and technology sectors.
Anuva is essentially a venture capital company which is atypical in that it targets investors who want to make use of a 12J SARS tax incentive to invest in South African businesses and grow local business opportunities and jobs. Section 12J of the Income Tax Act encourages investors to invest in small and medium businesses and get a reduction of up to 41% of their taxable income in the year the investment is made into an approved 12J company like Anuva. This kind of investment results in SMMEs being funded via equity rather than debt, which immediately stabilises the business and does not leave it with a crippling debt burden.
The return to companies like Anuva, one of South Africa’s first Section 12J venture capital companies, is in the form of dividends rather than interest.
While Anuva has invested in companies in business rescue, it is generally looking for established companies which are profitable, says Hobbs. “We are also looking at protecting and growing jobs, so we are not venture capital in the classic sense.
“We are also more risk averse so we ideally want up-and-running companies with a successful formula that need expansion capital.”
MasterCare, which went into business rescue in 2012, was in disarray, owing R80million to creditors and had escalating costs, severe cash-flow issues and unpaid staff.
“Normally, for a company in that kind of distress, venture capital or private equity firms would deem it as too high risk. But Anuva made the effort to understand us,” says Wesley Rabie, MasterCare’s CEO.
“An SME like ours plays such a vital role - if we were to be liquidated, the knock-on effect on the industry - from our staff to small spares suppliers, would be huge. Rescuing a business is not just about fresh capital and Anuva was able to bring on board experience and mentorship.
The firm is constantly looking to acquire companies that have synergies with what we do, providing the opportunity for us not just to survive but to grow again.
“We have been profitable for 30 months now, more profitable than we were in the last decade, and with better service delivery and customer satisfaction and we have been revitalised, with a culture similar to that of a start-up,” says Rabie.
Craig Homan, Medac CEO, says he was trying, unsuccessfully, to manage everything himself. Anuva, which invested last year, put in management, sorted out cash-flow, and started ironing out the company’s problems.
“For the first time I have more stock than sales, enabling me to now concentrate on sales and grow,” he says. Medac has employed 20 more people since Anuva invested, and it is looking to buy a company out of liquidation to complement Medac and save another 40 to 50 jobs, says Hobbs.
Anuva director Johan Slabber, who is responsible for turning investments around, says Anuva improves companies through more efficient structures and production runs, and increasing the revenue thus taking companies from a low base to a higher production level with the same people.
The improvements on the ground are watched closely by Anuva and its investors.
Michael Hainebach, who is both an investor in Anuva and one of its directors, says he was attracted to this investment as 12J is a formal structure created by SARS, making it easy for investors to understand the benefits and making investment in companies where jobs are created more attractive.
The structure follows a similar model in the UK which has been successful in driving investment into SMMEs, a sector usually avoided by big investment money.
Hainebach, who invested and became part of the team in order to monitor his investment, says Anuva’s advantage is that its founders have a lot of experience in business rescue. “They have seen companies in various stages of trouble, placing them in a good position to cherry-pick the opportunities.
“Private equity players say it is as much trouble to manage a small company as a big company, so they would rather go for the latter, and that pool is quite limited. This, on the other hand, is unlimited.”
“From an investor’s perspective, I am concerned about whether this is to my benefit, and Anuva has categorically proven this to me and I have benefitted from tax deductions,” he says. “My second concern is whether my investment is legitimate, and this is SARS endorsed/created so there is oversight and it has a legitimate, robust, trustworthy structure.”
“The third is whether my money is at risk. Yes it is, so it is important to make sure whoever manages it is doing a good job, and that box is also ticked for me.”
FSB Key Individual and fund manager, Larry Fitnum, says Anuva is run in line with FSB and SARS requirements. Its primary aim, he says, is to “look for companies which show promising growth, but need a hand through access to capital and access to skills and strong management.”
“Anuva will only invest if it is doing so for the right reasons,” says Hobbs. “We won’t go into any company just because it is a great opportunity. We want to be able to add value, grow the business, the SMME sector and support employment.”
Government has created a unique opportunity with great potential to benefit the country, through the 12J legislation. 12J promises to stimulate the SMMEs where jobs and opportunities are created and protected, while generously rewarding tax payers for taking part.
In the interest of transparency, Anuva which is a private company, publishes its results - which reflected earnings of R13.7million and a dividend of 28% to the initial investors in the year to February 2016.
ABOUT ANUVA INVESMENTS
Anuva Investments, one of South Africa’s first Section 12J Venture Capital Companies has announced its maiden results for the February 2016 financial year. The VCC has reported earnings of R13.7million and paid a dividend of 28% to the initial investors.
These impressive results are due to the company’s acquisition of Mastercare Appliances, which was under business rescue and needed a capital injection to complete the business rescue plan. According to Neill Hobbs, one of the founding members of Anuva Investments the successful business rescue of Mastercare would not have been possible without the ‘shot in the arm’ from Anuva.
SARS’s policy of boosting small-to-medium business was encouraged by the introduction of section 12J of the Income Tax Act in 2009. The Venture Capital Company was intended, by SARS, to be a marketing vehicle that will attract retail investors; having the benefit of bringing together small investors as well as concentrating investment expertise in favour of the small business sector. Tax-payers who invest via this equity finance vehicle receive a 100% tax deduction on funds invested.
Anuva now controls 69% of Mastercare and plans to expand are already underway. On 1 September 2016, Anuva invested in Mastercare Medical Supplies which will be the sole distributor of sports bracing and medical products for Medac (Pty) Ltd. According to Hobbs, “Through the acquisition of Mastercare we have a national infrastructure for sales and distribution. Mastercare Medical also has distribution rights to a number of export destinations, which is very exciting for us.” Anuva plans to launch a new energy venture, Mastercare Energy, which will provide cost-effective energy solutions to households.
Hobbs confirmed the Anuva VCC strategy is to invest into promising, well-managed small-to-medium companies which are securely established and have a proven track record but are under-capitalised. The company is exploring and conducting due diligence on opportunities in education, medical, energy, security and agro/processing businesses.
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