How To Restructure or Reorganize a Company
Companies often choose reorganization if they are having financial troubles, have new owners or staff, or are going through structural changes. Some businesses may restructure as a way to prepare for a sale, buyout, or merger.
Restructuring a company isn't guaranteed to work, however. While a successful restructure can lead to higher profits, greater efficiency, and debt paydown, an unsuccessful attempt can lead to bankruptcy.
Six Flags successfully managed a company restructure. In 2009, the company declared bankruptcy due to $2.7 billion in debt that it couldn't pay back. It eventually reorganized and emerged from its bankruptcy in 2010.
Kmart, on the other hand, is an example of a failed restructure. Its first attempt at company reorganization began in 2004 when it merged with Sears after declaring bankruptcy in 2002. However, Sears Holdings filed for bankruptcy itself in 2018.
Let's take a look at company restructuring and reorganizing to fully understand how the process works.
What Is Restructuring?
Restructuring is a process in which a company does a complete overhaul of its strategy, setup, and operations. A company may also reorganize its marketing strategies, staff, products and services, or business name.
There are a few reasons why a company may need or choose to restructure. It may need to change 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 restructuring is any substantial change in a company's financial structure, ownership or control, or business portfolio. The purpose of this kind of restructuring is to increase the company's value.
Going through the process of a financial restructure isn't just an option for companies that are struggling financially. Financially stable companies can also benefit from it. A financially stable company can opt to restructure as a preventative 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 a company's debt entirely in exchange for equity.
- Equity restructuring: If a company's assets aren't bringing in the profit they expected, selling those assets could be a good way to make money instead. One way to restructure a company's equity is to write down assets so they appear as expenses on an income statement, thus lowering the amount of taxes a company must pay.
In the case of equity restructuring, a company should have enough capital to cover any liabilities. Otherwise, the business could risk being forced to declare bankruptcy or merge with another company.
Organizational restructuring is when a company changes its business model, structure, or processes. These changes can include but aren't limited to the reorganization of company hierarchy, workforce adjustments, or the creation of new standard operating procedures.
A company may decide to 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
The best way to pull off an organizational restructure is to develop a plan and maintain consistent communication with company employees about that plan.
The Benefits of Restructuring
A successful company restructure can be beneficial in many ways. This includes increased profits, as well as gaining an advantage over competitors by positioning the company for growth. In general, though, a successful company reorganization brings survival and success.
A company can still reap these benefits even if it's relatively stable. Company reorganization isn't just for those who need to react to significant issues or scandals. A healthy company's reorganization can proactively set them up for further success. Regardless of a business's position, they all stand to gain similar benefits from restructuring.
Assessing the overall strategy of a company's operations can ensure that it is functioning at an optimum level. If there is inefficiency in certain areas, a business could do some organizational restructuring to ensure that tasks are running as smoothly as possible.
An efficient strategy may also lead to greater employee satisfaction. A satisfied employee is likely to be more loyal and productive.
Facebook benefited from reorganizing its strategy. Its first reorganization occurred in 2011 when it decided to restructure to accommodate growth and streamline its product development process. This restructure was successful, and Facebook is still one of the most popular social media sites today.
There are a few ways that a business's finances can benefit from a company restructure. One way that it can increase profits is by encouraging new investment opportunities from investors in the form of equity financing, which involves swapping ownership shares for capital.
A company that restructures by 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 that they see a professional legal or financial advisor to ensure that their restructure takes advantage of tax benefits.
Relieving a business of its debt is also a huge benefit when it comes to company restructuring. Six Flags is well known for using company restructuring to come back from a massive amount of debt.
A company needs to have a strong brand. If a company has noticed that they don't appeal to their target audience or their audience's needs are changing, they may benefit from adjusting their brand while restructuring the company.
It's important for a company to know their purpose in general if they want to fully understand their goals for a company restructure.
A company that eliminates subsidiaries or divisions that don't align with its original values during its restructure may see an increase in capital, as well as beneficial tax opportunities and greater flexibility.
Since the reasons behind a restructure vary between every company and its needs, there are multiple ways to approach a company restructure. Whichever strategy the company chooses depends on what benefits they are looking for from their reorganization.
Mergers, Demergers, Reverse Mergers
In a merger, a company is acquired and absorbed into another business entity, or the companies will combine into a new corporate entity. In many cases, companies 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 that will either operate individually, 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 refers to when a private company purchases a controlling share of a public company. This can allow the private company to be listed on the stock exchange without the need for an initial public offering (IPO).
The main difference between an acquisition and a merger is that in an acquisition, one company entity buys another, giving the purchaser total operational control. No company will be dissolved and no other company will be created in an acquisition. Both companies maintain their names and organizational structures.
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 fairly and share expenses, revenues, and control.
Consider Working With a Business Lawyer
It is a good idea to work with a lawyer when reorganizing or restructuring your business. Getting the legal requirements correct is necessary for a successful restructuring. You can find an experienced, local attorney through our attorney directory.