Many enterprises experience corporate restructuring at some point. Companies often undergo restructuring to improve their competitiveness by cutting costs, improving efficiency, and boosting profits.
The financial aspects of corporate restructuring strategies may be aided by extensive valuations of firm assets, which can help optimize the advantages of reorganization. However, a successful business restructuring is an intensive and complicated endeavor, which is best served by an accurate assessment of the companys overall value or the value of the individual parts. To correctly formulate the impact of corporate restructuring methods, you must begin with an accurate assessment of the companys assets. There are many distinct forms of corporate restructuring, each with its unique characteristics and motivations. Today, well cover âwhat is restructuring?â and the most prevalent strategies for how to restructure a company.Â
Restructuring is when a company makes significant changes to its financial or operational structure, typically while under financial duress Companies may also restructure when preparing for a sale, buyout, merger, change in overall goals, or transfer of ownership. The goal of restructuring is to make the business more efficient, profitable, and financially stable.
There are several different types of restructuring that a company can undergo:
Operational Restructuring
This involves reorganizing the company’s day-to-day operations to reduce costs and improve efficiency, Common approaches include
- Downsizing or rightsizing the workforce
- Closing underperforming locations or business units
- Outsourcing certain functions
- Automating processes
- Flattening management hierarchies
- Realigning departments and reporting structures
Financial Restructuring
This focuses on reconfiguring the company’s capital structure and financial obligations. Strategies include:
- Renegotiating debt terms with lenders
- Converting debt to equity
- Obtaining new financing
- Selling assets to pay down debt
- Filing for bankruptcy protection to reorganize debts
Corporate Restructuring
This refers to making major changes to the company’s legal and ownership structure. Examples include:
- Mergers and acquisitions
- Spin-offs or divestitures
- Joint ventures
- Taking the company private
- Transitioning from LLC to corporation
Turnaround Management
This involves implementing an urgent, high-level turnaround plan during a crisis period. The goal is to quickly stabilize the company and return it to profitability.
Business Process Reengineering
This seeks to overhaul a company’s underlying processes, systems, and workflows. It goes beyond surface-level changes to reimagine how work gets done.
Let’s explore these different restructuring types in more detail:
Operational Restructuring
When a company restructures its operations, the goal is to cut costs, eliminate inefficiencies, and better align resources to support sustainable growth. Common operational restructuring strategies include:
-
Workforce reductions: Trimming staff through layoffs, voluntary buyouts, attrition, or early retirement programs. This brings labor costs in line with revenues.
-
Location closures: Shutting down underperforming locations, plants, stores, or offices to optimize the geographic footprint.
-
Asset sales: Selling off non-core assets like real estate, equipment, or intellectual property to raise cash and reduce expenses.
-
Department reorganization: Consolidating or eliminating certain departments, redistributing responsibilities, and flattening reporting structures to reduce duplication.
-
Process automation: Using technology to automate manual workflows, thereby lowering labor costs and boosting productivity.
-
Outsourcing and offshoring: Contracting with third-party providers, often overseas, to handle non-core functions at a lower cost.
-
Supply chain optimization: Renegotiating with suppliers, changing distribution models, reducing SKUs, and improving inventory management to cut procurement and logistics costs.
Properly executed, operational restructuring helps struggling companies stop cash burn, reduce overhead, and focus resources on core operations and profit centers. It brings the business model back in line with market realities.
Financial Restructuring
Financial restructuring aims to improve a company’s balance sheet and return it to a stable capital structure. Common financial restructuring strategies include:
-
Debt renegotiation: Working with lenders to refinance, reduce interest rates, extend maturities, relax covenants, or convert debt to equity. This reduces near-term cash obligations.
-
New capital infusion: Attracting new investment through preferred stock, convertible debt, warrants, or private equity. This provides liquidity and reduces leverage ratios.
-
Asset sales: Divesting non-core assets not only raises cash but also allows for debt repayment. Removing assets also improves working capital.
-
Vendor financing: Negotiating extended payment terms, line of credit, or trade credit with suppliers provides flexibility when managing AP.
-
Bankruptcy reorganization: Using Chapter 11 to invalidate contracts, shed liabilities, and equitize debt while continuing to operate. This reconstructs the balance sheet.
-
Debt exchange offers: Proposing exchanges where certain creditors take discounted payoffs, equity, or new secured debt in return for forgiving existing debts.
Proper financial restructuring reduces the burden of fixed obligations while ensuring access to sufficient working capital. This provides businesses the runway needed to turn around.
Corporate Restructuring
Corporate restructuring entails major changes to a company’s legal and ownership framework. Reasons companies may restructure corporate entities include:
- Divesting non-core divisions or spinning off business units
- Acquiring competitors or complementary businesses
- Seeking a merger of equals or consolidating within an industry
- Going private via buyout or taking the company public
- Transitioning from LLC to C-Corp or vice versa
- Forming joint ventures, strategic partnerships, or special purpose entities
Major corporate restructuring is often seen during mergers and acquisitions. But it can also be done independently to remove silos, simplify corporate structures, optimize tax efficiency, or prepare a company for eventual sale.
Complex corporate restructurings require significant legal, tax and accounting expertise. Small details like transfer pricing policies, entity classification, licensing agreements and employee transitions must be handled properly.
Turnaround Management
Turnaround management is an urgent overhaul enacted during a crisis period. The goal is to swiftly stabilize the company, return to profitability, and avoid collapse.
Turnaround scenarios typically involve:
-
Cash infusion: New capital from investors or lenders provides needed liquidity. Vendor financing and accelerated collections may also improve cash reserves.
-
Leadership change: Founders step down or lenders appoint turnaround specialists able to make difficult restructuring decisions.
-
Cost cutting: Rapid initiatives include layoffs, location closures, ending projects, and slashing overhead costs.
-
Business focus: The company drops unprofitable customers, products, and services to focus on core competencies. Non-core assets may be divested.
-
Operational improvements: Lean manufacturing, Six Sigma, and other methodologies boost productivity and efficiency.
-
Debt renegotiation: Lenders grant covenant waivers or relax terms to help the company buy time to recover. Filing bankruptcy protection may also be required.
The fast actions taken during turnaround management aim to quickly stop cash burn and buy time to implement lasting restructuring.
Business Process Reengineering
BPR represents complete business transformation through radical redesign of processes and systems. Rather than optimizing current workflows, companies “reengineer” work to be efficient from the ground up.
Common BPR approaches include:
-
Cross-functional workflows: Integrating siloed departments to improve handoffs, communication, and process flows.
-
Flattened hierarchies: Removing unnecessary management layers speeds decision making and information flows.
-
Shared services centers: Consolidating back-office support functions in one location increases efficiency.
-
IT overhaul: Replacing outdated legacy systems with modern platforms and automation capability.
-
Customer-centric design: Using customer journey mapping and user experience principles to reimagine CX.
-
Continuous improvement: Building in lean thinking, agile frameworks, and change enablement to support ongoing enhancement.
Because it is so radical, BPR requires strong leadership, change management, employee training, and smart integration of enabling technologies. When done right, however, BPR allows companies to completely reinvent themselves.
When is Restructuring Necessary?
Restructuring becomes necessary when a company’s current business model is no longer financially viable. Common triggers include:
- Consistent operating losses / negative cash flow
- High fixed costs relative to revenues
- Excessive debt obligations and interest expense
- Loss of market share / declining sales
- Cost and pricing pressures from competition
- Technological disruption or shifts in consumer demand
- Supply chain disruptions or commodity/input price swings
- Macroeconomic downturns and crises
- Overexpansion or domestic saturation
Due to inertia, companies often postpone restructuring until facing an existential crisis. But proactive restructuring helps realign operations, finances, and strategy before losses become life-threatening.
Restructuring Process and Timeline
Major restructuring takes 6-24+ months depending on complexity. Steps typically include:
-
Assessing need: Identifying problems requiring restructuring based on financials, market analysis, operations data, etc.
-
Planning: Modeling restructuring options and financial impact. Developing the business case, timeline, budgets.
-
Capital infusion: Securing financing if needed to fund restructuring initiatives and maintain liquidity.
-
Legal/regulatory prep: Navigating relevant laws, approvals, and governance based on restructuring plan.
-
Communications: Informing employees, shareholders, creditors, suppliers, and partners throughout the process.
-
Implementation: Executing workforce, asset, systems, and operational changes per plan.
Why Is Restructuring Important?Â
Restructuring company organization and financial assets through inorganic growth strategies include mergers, amalgamations, and acquisitions, which can be a lifesaver for businesses on the brink of collapse. Creating synergy is the common objective of these company restructuring strategies. The value of the combined firms is larger than the sum of their parts because of this synergy effect. For the most part, synergy might take the shape of higher revenues or lower costs. An individual companys competitive position and its contribution to corporate objectives are the primary goals of corporate restructuring.
Companies expect to get the following advantages through various corporate restructuring strategies:
Market Share â Mergers provide for a larger share of the combined market for the merged firm. Increasing your market share is as simple as offering your customers more of what they want and need. One way to achieve this result is through a horizontal merger.
However, while companies attempt to become the dominating player or the market leader in their specific industry through mergers and acquisitions, they may be subject to the Competition Act of 2002, which regulates this type of potential monopoly.
Reduced Competition â Company restructuring strategies resulting in a horizontal merger also have the added benefit of reducing competition.Â
Scale in Growth â Mergers and acquisitions allow companies to increase in size and become a more dominant force in the marketplace than their rivals. If you want to build a business by organic means, youll have to wait for a long time. However, acquisitions and mergers (i.e., inorganic expansion) may accomplish this in rapid succession.
Scale in Cost â It is possible to reduce the cost per unit of production by merging two or more businesses. The fixed cost per unit decreases when the total output of a product rises.
Tax Advantages â Companies often utilize mergers and acquisitions for tax reasons, particularly in cases where a profit-and-loss firm merges with another. The set-off and carry-forward provisions of Section 72A of the Income Tax Act, 1961, provide a significant tax benefit.Â
Technology Adoption â Companies must pay attention to new technological breakthroughs and how they might be applied to the commercial world. Enterprises can gain a competitive advantage by acquiring smaller firms that have unique technology.Â
Brand Adoption â Brand loyalty is a huge driving factor in sales, and many companies will opt to buy a well-known brand rather than start from scratch in order to reap the benefits.
Diversification â Some companies hope to expand their offerings via the joining of businesses engaged in unconnected fields. It aids in the smoothing of the companys business cycles, hence lowering risk by having a large number of enterprises.Â
Saving an Insolvent Company â The Insolvency and Bankruptcy Code, 2016 has opened up a new channel for the purchase of a company that is in the process of going bankrupt.
Types of Corporate RestructuringÂ
Typically, there are two types of corporate restructuring, and the cause for restructuring will influence both the kind of restructuring and the corporate restructuring strategy:
This form of restructuring a business may be necessary if the companys total sales see a significant decline owing to the current economic climate. The business entity has the option to adjust its equity structure, debt service schedule, equity holdings, and cross-holding pattern in this location. All of this is being done to keep the market and the companys profits strong.
Restructuring a companys finances can be accomplished by using a debt-for-equity swap. An equity stake, such as stock in the firm, is exchanged to cancel a companys debt to a lender under a debt/equity swap arrangement. A renegotiation of debt is another way to look at it.
Companies implementing a debt/equity swap are typically in rocky financial waters, such as cash flow issues or company losses.
A lender may be ready to exchange a debt obligation for an equity holding in a firm if it is evident to the lender that the company would be unable to repay its current debt in a reasonable length of time.
However, this type of corporate restructuring would only happen if the lender feels that the debt cancellation would allow the firm to stay viable.
The company can also borrow money to pay for the buyout, which would put more debt on the books. Leveraged buyouts are another name for this approach to increasing debt. One founder can buy out the other founders shares by using a tactic known as “debt loading.” Cash flow is used to pay down debt by repurchasing and retiring shares. Of course, taking on more debt comes with its own set of challenges.
Changes in a companys organizational structure, such as decreasing its hierarchy level, revamping job roles, shrinking the workforce, and modifying reporting connections, are all examples of operational restructuring. Reduce costs and pay off debt through a reorganization like this to keep the companys operations going.
A portfolio restructuring approach that involves divesting assets is known as a divestiture strategy. Divisions and subsidiaries that are no longer profitable or that no longer suit a firms overall strategy are sold or spun off. Restructuring a companys portfolio helps it to refocus on its main business and obtain much-needed financing. With the money it earns from these deals, it may invest in its leading company. It also may invest in other companies that fit in with its strategy and help it achieve a positive net income.
What is Business Restructuring? Why Is It So Important to an Effective Digital Transformation?
FAQ
What does it mean to restructure your business?
What is restructuring in simple terms?
Is restructuring good for company?
What is corporate restructuring?
Corporate Restructuring is the financial reorganization of a distressed business with a capital structure deemed unsustainable. In particular, corporate debt restructuring refers to the reorganization of the financial obligations belonging to the company.
How does a company restructure?
A company can also restructure its operations or structure by cutting costs, such as payroll, or reducing its size through the sale of assets. Restructuring is when a company makes significant changes to its financial or operational structure, typically while under financial duress.
What is a legal restructuring?
Legal restructuring: A company or its departments change their legal entity, policies or procedures. Cost restructuring: A company consolidates to weather an economic downturn. Turnaround restructuring: A company changes strategy, product lines or organization, for example, by discontinuing a non-profitable product line.
When does a company undergo a restructuring?
Companies also undergo restructuring when they decide to move their overall business focus in a new direction. When they make this decision, restructuring is necessary to realign the company’s resources with its overall goals. A change of direction may result from poor business performance or a new strategy aimed at improving profitability.
