Corporate Restructuring: Advantages and Risk Factors
Is your business preparing for a corporate restructuring?
Company restructuration is typically caused by low financial performance. Businesses may be better off closing their business entirely, but those who can continue may consider corporate restructuring to fix internal issues and restart with better plans.
But there are more areas to go through when you’re considering this option.
What is Corporate Restructuring?
Corporate restructuring is when a business makes drastic changes to its setting, whether financial or operational. Companies will recognize the need to reorganize business when they are preparing for merge, bought by another company, on the verge of bankruptcy, or there are major strategies to be implemented.
Business restructuring, in most ways, is a severe action needed to withstand the market. It’s often a solution for businesses that are under financial duress. But, pulling this trigger can make or break a business.
Some researchers suggest that a preemptive corporate restructuring is more valuable than doing it in an attempt to save a failing company.
Higher-ups are critical decision-makers on whether a company restructuring is necessary, and if it will fail or succeed
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Reasons for Corporate Restructuring
Typically, companies who undergo major changes are either poor in financial performance and are no longer fit to withstand their competition. But there are a number of ways that a company will decide to restructure
To regain competitive advantage or avoid bankruptcy, companies reach out to buyers or allow themselves to be bought out by another company.
Merge with another company
A company can merge with another who is in the same market or even with a competitor. This will allow them to refocus their resources and survive the market.
Financial troubles can lead to permanent closure, thus, planning of a corporate restructure may be key to avoid this.
When existing plans and strategies aren’t working, a shift in focus may be the solution to help the business thrive and compete.
Series of poor decisions from executives
Even your good leaders will make bad decisions. But a series of wrong ones can greatly affect the entirety of the business.
What are the types of corporate restructuring?
There are various types that connect to the reasons why a corporate restructuring happens.
Corporate buyout or takeovers
A corporate buyout or takeovers is when a business decides to sell a majority of its assets to another. A company can own more than 50% of your stock and let them take over a business to help it thrive.
It’s common to be bought out by a business in the same market which will allow them to expand their portfolio by leveraging on the existing assets of the company that’s been bought. But there are no stopping businesses across all markets from taking over another company and generate new sources of income.
Mergers and acquisitions as a corporate restructuring solution can increase performance or save it from closure.
There are three types of businesses a company can choose from:
First, a business that has similar core competencies that are easy to integrate into the restructuring.
Second, merging with a complementary business will help in the expansion and generate better profits.
Third, a hostile merger – merging with a direct competitor who’s dominating the market.
A restructuring of financial equity and debt can help stabilize the business and its whole operations. If a company is no longer able to sustain itself and is experiencing a financial downfall, recapitalization may be the way out.
Restructuring a company can also a result of divestiture or selling off assets and subsidiaries to regain a better standing. Divestiture is a needed fix to shift the focus of the business and let go of areas that are pulling them back.
How Restructuring Works
Operations and departments will change when a company goes through the restructuring process. In the hopes of enabling the company to increase its profits, they often hire legal and financial advisors to assist the process.
Here are 7 essential steps to help you go through the phases of corporate restructuring.
- Establish a committee – Find key people to help you move forward with your restructuring plans.
- Assess and evaluate current status – An in-depth evaluation is required to plan out ways to achieve your business goals.
- Perform financial analysis – Check financial statements and identify the trends to make better predictions for your company’s growth.
- Create a corporate restructuring plan – Plot your plan and make sure that everything is aligned, smooth, and ready to launch
- Implement the plan – Integrate your restructuring plan to all levels of the department and ensure that all areas are well informed.
- Monitor changes – Proper documentation and monitoring will help map out the highs and lows of your restructuring plan.
- Analyze results – Analyze what happened to all aspects affected by the restructuring. Keep the ones that are performing well and generate better strategies for areas that are failing.
Top Risks of Corporate Restructuring
Corporate restructuring, while a strategic solution to improve a business’s performance, will often go through various risks.
Return of investments will determine how your restructuring affected your overall business performance. If it causes you to have higher costs than your revenue, it’s best to reevaluate and plan out another set of strategies.
When taking on a new set of policies and strategies after restructuring, executives and managers may be aiming for a different set of goals for their areas of responsibility. Failing to sync company decisions from the top will cause a domino effect and translate it to all aspects of the company.
A corporate restructuring can result in departmental chaos.
The departments will go through a complex process and can trigger high employee turnover rates. Dividing groups of people and assigning them to other areas may cause confusion and ultimately affect their daily work performance.
A corporate restructuring will affect employee departments and may have overlapping roles that they need to let go of. Some functions may be eliminated and employees may be laid off.
It’s a painful process but in order for businesses to sustain more jobs and keep the business profitable, difficult decisions are made to have smooth and profitable business operations.
The risk here is that having to let go of employees can cause your existing ones to lose their motivation that will ultimately affect a department’s efficiency.
Not all restructuring ends in a good spot. There are unfortunate businesses who succumbed to the challenging market or have their own internal issues that cannot be solved anymore, even after another restructuring.
A rapidly changing market and economy play huge roles in the business. Those who do not survive the process may begin liquidating their assets to pay off loans.
Objectives of Corporate Restructuring
Changing a business from its core means that decision-makers have plotted out a means for their company to not only survive the transition but also to achieve higher performances.
Usually, the goals of corporate restructuring are as follow:
Generating value is still a major part of any business objective. And since it’s a business, the financial output will remain to be the top motivator of a business restructure.
Solutions for Your Corporate Restructuring Needs
In times of pandemic, a lot of businesses are facing a challenging predicament. They have to be flexible and make tough decisions now more than ever.
Corporate restructuring is often complex and time is of the essence. Too late a decision can be the cause of a company’s failure to rise up. A quick and systematic approach will make a huge difference in the outcome of how restructuring will bring to a company.
That’s why we’re here to help create tailored solutions that will help solve the issues your business is facing. Whether you’re still on the fence or are ready to restart, you can talk to us.