Corporate restructuring is a significant change in a company’s legal and accounting structure, often involving acquisitions, spin-offs, and divestitures. These changes are often viewed as revolutionary by the press and analysts and are often linked to increased trading activity in securities.

There are different reasons why an organization restructures their firm, which may include changes in strategy, a lack of profitability, and cash flow requirements, using restructuring strategies such as mergers, amalgamations, and acquisitions.

How beneficial is corporate restructuring? What are the types of restructuring, and what are the best strategies to improve a business? This article will outline the answers to this.

Corporate Restructuring

Corporate restructuring is a process where a corporation drastically changes its financial and operational features to improve profitability and meet organizational requirements.

This restructuring can respond to market shifts, ownership changes, demergers, or crises like bankruptcy. Also, there are various reasons why a company will choose to restructure, such as deteriorating financial fundamentals, poor earnings, excessive debt, or inadequate revenue. It can also prepare for sales, buyouts, mergers, changes in aims, or changes in ownership.

The Importance of Corporate Restructuring

The key importance of corporate restructuring includes debt restructuring, cost reduction, mergers and acquisitions, divestment and spin-offs, and improved efficiency and effectiveness.

Companies can restructure their debt and continue trading by introducing a Company Voluntary Arrangement (CVA), which offers short-term relief from debts in exchange for a guarantee that the company will honour them in the future. This is one of the primary motivators for business restructuring, as debt restructuring allows companies to restructure their debt and continue trading.

The reduction of costs can be accomplished without reducing the number of employees by increasing productivity and decreasing the amount of money spent on overhead expenses. Boosting revenue, production capacity, and market reach through mergers and acquisitions is possible, bypassing the time and effort required to develop a new company.

Businesses can more easily achieve high values by adopting divestment and spin-off strategies, which involve selling off business segments that are not profitable or strategic to the company. A spin-off is the process of reorganizing a business unit to be spun off into its own independent firm, in which the parent corporation maintains some ownership.

One more advantage that comes with business restructuring is an increase in both efficiency and effectiveness. However, companies need to collaborate with professionals who can direct them through the process and guarantee they make the appropriate choices.

Customer loyalty plays a significant role in driving sales, so many businesses acquire established brands instead of starting from scratch. Diversification allows companies to increase the variety of their products and services by partnering with other companies operating in unrelated industries. This helps even out the ups and downs of a company’s business cycles and reduces the risk of owning many businesses.

Types of Corporate Restructuring

There are different types of corporate restructuring. They include the following:

#1. Organizational Restructuring

Organizational restructuring involves altering an organization’s hierarchy, combining or eliminating positions, and potentially disrupting existing working relationships. These adjustments aim to improve production, efficiency, and communication.

Examples of operational restructuring include lowering hierarchy, redefining job positions, reducing headcount, and adjusting reporting linkages. Companies must pursue restructuring to maintain normal business operations, cut costs, and pay off debt, as it is necessary for companies to maintain cost-effectiveness and efficient operations.

#2. Operational Restructuring

Operational corporate restructuring is a process in corporate management that involves rearranging a company’s legal, ownership, operational, or other structures to increase profitability or better meet its current requirements. This is often done when a firm faces financial constraints or other problems, aiming to enhance its financial health or align operations with broader goals, thereby improving overall alignment.

This may involve adopting new forms of automation technologies and doing away with redundant processes. The company may hire a third party to handle specific duties to cut costs or concentrate on its essential operations.

#3. Financial Restructuring

Financial restructuring is crucial for businesses to maintain market stability and profitability. It involves adjusting the company’s equity structure, debt service schedule, equity holdings, and cross-holding pattern to maintain market share and profits. A debt/equity swap is another option, exchanging an equity stake to cancel a company’s debt to a lender. This is often used when a company faces financial difficulties, such as cash flow issues or losses.

Debt loading is another strategy where a company borrows money to pay for a buyout, putting more debt on the books. This involves one founder buying out the other founders’ shares and using cash flow to pay down debt. However, taking on more debt comes with its own set of challenges.

Financial restructuring is crucial for businesses to maintain market stability and profitability.

Reasons for Corporate Restructuring

Some reasons for corporate restructuring include:

• Restructuring debt is one of the most common reasons a business needs to change. A company could adjust its debt to lower its obligations and make more money. It can do this by making a Company Voluntary Arrangement (CVA), a contract between the company and its creditors that is legally binding. This deal gives short-term relief from debts in exchange for a promise from the company that they will be paid in the future. The company can also restructure its debt by giving its creditors shares of the business. This can help pay off some or all of the company’s debts.
• If a business is getting increasingly in debt, it’s probably because its operating costs are too high. Restructuring can help cut costs by selling assets that aren’t needed to get cash, cutting the number of workers, or reorganizing departments to get rid of management costs that aren’t needed. This process can also help the business work better.
• Changes in the market. Companies may use corporate restructuring strategies in reaction to falling profits, general market or economic forces and trends, changes in ownership, changes in corporate strategy, or to increase cash flow.
• The management of the struggling company might improve the company’s performance by eliminating divisions and businesses that are not aligned with the company’s primary objectives. The department or subsidiary may not fit the company’s overall long-term strategy. Therefore, the company has concluded that it needs to shift its attention to its primary objectives and market these assets to prospective purchasers.
• Discontinuing work on a project that isn’t producing desirable results may result in significant financial gain for the business. Selling an asset is one option for a firm having problems securing funding to get money and pay down debt simultaneously.
• The idea that a combined unit’s value is more significant than its parts’ value is at odds with the concept of synergy, which states that a combined team’s value is greater than its features’ value. The idea of reverse synergy proposes that the value of a single unit may be greater than the value of two teams working together. This is a typical scenario in which a firm can decide to liquidate its holdings and sell its properties. The corporation in question may conclude that selling a portion of itself to a third party will generate more revenue than retaining ownership.

Corporate Restructuring Strategies

The strategies for corporate restructuring can vary based on the specific needs and circumstances of the company. They might include:

• Mergers and Acquisitions (M&A): This is when a company is acquired and absorbed into another business entity or combines with another existing company to form a new corporate entity.
• Divestiture: Also referred to as divestment, this involves the sale or liquidation of subsidiaries or other assets. Companies can sell assets such as subsidiaries or intellectual property, exit a business through a trade sale, form a spin-off, or issue an IPO.
• Joint Venture: In a joint venture, two or more companies form a new business entity. The individual companies agree to contribute specified resources and share the new company’s expenses, profits, and control.
• Recognize the Importance of Change Management: Change is challenging; therefore, engage your employees using reason and emotion to help them embrace the transformation. The most successful change management programs focus significantly on shifting culture, but this change only works if there is a high degree of psychological safety, where employees can vocalize concerns and opinions without fear of repercussion.
• Propose a New Business Strategy: Once you’ve focused on the restructuring you’d like to make, it’s time to draw up a new business strategy. You’ll need to devote time and resources to properly brief and train your employees to ensure a smooth transition to the new way of doing things.
• Involve Your Investors: Communicating regularly with your investors and keeping them involved can help weather the storm. If you can renegotiate the terms of their investment, you may need to amend your shareholders’ agreement to reflect these.
• Cost Reduction: Reviewing your company structure can highlight overspending in your business’s administration or operations. To reduce costs, you may consider selling unneeded assets to realize cash, reducing the number of employees, or restructuring individual departments to remove unnecessary management costs.
• Profit Segmentation: When companies use new, granular, transaction-based metrics and analytics, they can quickly see that their customers (and products) fall into three broad profit segments: “Profit peaks,” their high-revenue, high-profit customers; “profit drains,” their high-revenue, low-profit/loss customers; and “profit deserts,” their low-revenue, low-profit customers that produce minimal profit but consume about 50% of the company’s resources.

How to Make Corporate Restructuring Work for You

To make corporate restructuring work effectively, follow four guidelines: start early, consider the type of reorganization needed, execute a strategic plan to realize maximum value, and engage in successful communication.

Start early to avoid challenges and create more value. Then, determine the type of reorganization needed, such as bankruptcy proceedings, reforming outside the court system, or reducing the workforce.

Execute the reorganization with a strategic plan, considering taxable revenue, downsizing, and the timeline. Finally, engage in successful communication to ensure the company’s stock price is directly influenced by the reorganization’s sale to investors or conveyed to them.

What Are the Benefits of Restructuring?

The process of restructuring offers a multitude of benefits to an organization. They include:

• Cost Savings
  Restructuring can lead to significant cost savings. This can be achieved through downsizing (doing the same amount of work with fewer employees), eliminating redundant roles and processes, and reallocating resources to more profitable activities.
• Improved Efficiency
  Restructuring can enhance operational efficiency by streamlining processes and eliminating unnecessary roles and tasks. This can lead to improved customer satisfaction and higher efficiency levels across departments.
• Employee Morale and Productivity
  Restructuring can positively impact employee morale by shifting the focus from process-driven objectives to ones directly related to achieving business goals. It can also lead to improved communication and collaboration within the organization.
• New Opportunities
  Restructuring can help businesses identify and explore new areas of growth and opportunity. This can involve investing in new products or services, entering new markets, or restructuring the organizational structure to meet customer expectations better.
• Improved Tax Efficiency
  Restructuring can also improve tax efficiency by eliminating redundant costs and taking advantage of available deductions and benefits. Companies can utilize the benefits of cross-border investment and take advantage of lower-tax jurisdictions.
• Improved Decision-Making
  Restructuring can lead to improved decision-making as it reduces departmental silos and allows for greater collaboration between different parts of the business.
• Positive Impact on Reputation
  Organizational restructuring can positively impact a company’s reputation. By demonstrating an effort to improve efficiency and quality, companies are more likely to attract new customers and retain existing ones.
• Adoption of New Technologies
  Restructuring provides an opportunity for businesses to adopt new technologies. By freeing up resources, companies can invest in cutting-edge technology that improves the efficiency of their operations. 

Conclusion

Organizations pursue corporate restructuring for various reasons, such as changes in strategy, lack of profitability, or cash flow requirements. Mergers, amalgamations, and acquisitions are different strategies companies can use to restructure their organizations and financial assets. The primary goal of these strategies is to create synergy and increase the value of the combined business. These restructuring strategies can increase market share, decrease costs, and competitive advantages. Overall, corporate restructuring helps companies to maintain stability, profitability, and competitive positioning in the market.

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References

• CFA Institute
• Ansarada
• Porte Brown