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How To Restructure or Reorganize a Company

A piece of paper on a clipboard reads “company restructuring.”

Companies reorganize if they have financial troubles, have new owners, or are undergoing structural changes. Small businesses may restructure to prepare for a sale, buyout, or merger.

Business restructuring doesn't always work. A successful restructuring can lead to higher profits, greater efficiency, and debt paydown. An unsuccessful attempt can lead to insolvency or bankruptcy.

Large or small, businesses need a restructuring or reorganization plan before beginning the restructuring process. The most drastic reorganization is a Chapter 11 bankruptcy. This method is useful for businesses facing liquidation since it allows them to pay off creditors while restructuring the company.

Small business owners may consider other types of reorganization before they reach the bankruptcy and liquidation stage. This article reviews some of the options.

What Is Restructuring?

Restructuring is when a company overhauls its strategy, setup, and operations. A company may also reorganize business units, staff, products, or services.

There are a few reasons why a company may need to restructure, such as changing its organizational structure or business model. Financial benefits like profit growth can also inspire a company to reorganize.

There are two main types of restructuring: financial and organizational.

Financial

Financial restructuring is any substantial change in a company's economic structure, ownership or control, or business portfolio. These kinds of restructuring plans aim to increase the company's value.

Going through the process of financial restructuring isn't just an option for struggling companies. Stable companies can also benefit from it. A financially stable company can opt to restructure as a preventive measure or to save money.

There are two components of financial restructuring:

  • Debt restructuring: This involves negotiating with creditors to reduce debts or interest rates. Some creditors may forgive all of a company's debt in exchange for equity.
  • Equity restructuring: If a company's assets aren't bringing in the expected profit, it may need to sell some assets. Another way to boost profits is to write down assets, so they appear as expenses on an income statement. This lowers the amount of taxes a company must pay.

In the case of equity restructuring, a company should have enough capital to cover any liabilities. Undercapitalization could force the business into bankruptcy or a merger with another company.

Organizational

Organizational restructuring is when a company changes its business model, structure, or processes. These changes include reorganizing the company hierarchy, workforce adjustments, or creating new standard operating procedures.

A company may do some organizational restructuring when management determines that a part of the business should change. Common reasons for organizational restructuring include:

  • Maintaining a competitive edge against competitors by assessing and modifying the company's functions
  • Changes in work structure and operation
  • Leveraging market opportunities
  • Keeping up with the customers' needs to maintain satisfaction
  • A merger that leads to a rebrand
  • Issues in the internal structure of the company
  • Insufficient company leadership

An organizational restructuring needs good communication within the business. Employees may see a major change as a sign of impending layoffs and flee the company unless management keeps them in the loop.

The Benefits of Restructuring

A successful company restructure can be beneficial in many ways. This includes increased profits and gaining an advantage over competitors by positioning the company for growth. In general, a successful company reorganization brings survival and success.

A company can still reap these benefits even if it's stable. Company reorganization isn't just for reacting to significant issues or scandals. A healthy company's reorganization can set them up for further success. Regardless of a business's position, it can benefit from restructuring.

Strategy

Assessing the overall strategy of a company's operations can ensure that it is functioning at an optimum level. If certain areas are inefficient, organizational restructuring can ensure that tasks are run with greater efficiency.

An efficient strategy may also lead to greater employee satisfaction. Satisfied employees are more loyal and productive.

Profits

There are a few ways that a business's finances can benefit from a business reorganization. One way is equity financing, which involves swapping ownership shares for capital.

Merging with another company can reduce compliance and administrative costs. Other cost benefits of restructuring include an increase in tax efficiency.

If a company is trying to restructure for tax benefits, it's important to get legal or financial advice. This will ensure their restructuring takes advantage of tax benefits.

Relieving a business's debt is also a huge benefit to company restructuring. 

Branding

A company needs to have a strong brand. Rebranding during restructuring can help a company refocus its product on its audience. A company needs to know its purpose in general to understand its goals for a company restructuring.

Eliminating subsidiaries or divisions that don't align with your original values during restructuring may increase capital. It can also lead to beneficial tax opportunities and greater flexibility.

Restructuring Strategies

Since the reasons behind a restructuring vary between every company and its needs, there are multiple ways to approach a company restructuring. The strategies depend on the benefits they are looking for from their reorganization.

Mergers, Demergers, Reverse Mergers

In a merger, a business entity acquires another company and either absorbs it or combines it into a new corporate entity. Companies may merge when they notice that their business synergies are similar and could benefit each other.

A demerger occurs when a company splits itself up into separate components. The entities may operate on their own, liquidate, or be sold to raise capital. A demerger may also create separate company entities so that each may handle its specific operations.

A reverse merger is when a private company purchases a controlling share of a public company. This lets a private company list itself on the stock exchange without an initial public offering (IPO).

Acquisition

In an acquisition, one company entity buys another, giving the purchaser total operational control. There is no dissolution and no company creation during an acquisition. Both companies maintain their names and organizational structures.

Joint Ventures

A joint venture is a business enterprise undertaken by two or more companies that agree to pool their resources. Under their business contract, the parties agree to contribute and share expenses, revenues, and control.

Consider Working With a Business Lawyer

Working with a lawyer when reorganizing or restructuring your business is a good idea. Getting the legal requirements correct is necessary for a successful restructuring. You can find an experienced local attorney through our attorney directory

Next Steps

Contact a qualified business attorney to help you tie up all loose ends when closing your business.

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Next Steps

Contact a qualified business attorney to help you tie up all loose ends when closing your business.

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