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 company's 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 company's assets. There are many distinct forms of corporate restructuring, each with its unique characteristics and motivations. Today, we'll cover “what is restructuring?” and the most prevalent strategies for how to restructure a company.
Corporate restructuring is the process of reorganizing a company's management, finances, and operations to improve the efficiency and effectiveness of the company. Changes in this area can help a company increase productivity, improve the quality of products and services, and reduce costs. They can also help a company better serve the needs of its customers and shareholders. Restructuring businesses may also result in the closure of underperforming or unprofitable business units.
For some ventures, a company restructure may be a final effort to retain solvency when a firm is in financial trouble and has to restructure its debts with its creditors. To keep the business afloat, the procedure entails reorganizing the company's debt and selling off non-essential assets.
Companies can either have their restructuring done informally (outside the court system) or through one of the various legal corporate restructuring strategies, depending on the severity of their condition.
In the following cases, corporate restructuring is used:
Some divisions and subsidiaries that do not fit with the company's primary strategy are eliminated by the troubled company's management in an effort to boost performance. Strategically, the division or subsidiaries may not fit in with the company's long-term goals. Such assets will be sold to possible purchasers so that the company may focus on its primary strategy.
The venture may not generate enough revenue to pay the company's capital expenditures, resulting in an economic loss. Management's erroneous decision to start the division or the reduction in profitability of the endeavor may be the cause of bad performance. This might be due to changes in client requirements or rising prices.
As the name implies, reverse synergy postulates that the value of a single unit may be greater than the combined value. This is a frequent motive for the corporation to sell up its assets. The concerned company may determine that selling a division to a third party is better than keeping it in-house since it would bring in more money.
Getting rid of an unprofitable project might bring in a significant amount of money for the organization. Selling an asset can be a way to raise cash and decrease debt for a company that is having difficulty securing financing.
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 company's 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 — 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 — Company restructuring strategies resulting in a horizontal merger also have the added benefit of reducing competition.
Scale in Growth — 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, you'll have to wait for a long time. However, acquisitions and mergers (i.e., inorganic expansion) may accomplish this in rapid succession.
Scale in Cost — 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 — 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.
Technology Adoption — 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.
Brand Adoption — 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 — Some companies hope to expand their offerings via the joining of businesses engaged in unconnected fields. It aids in the smoothing of the company's business cycles, hence lowering risk by having a large number of enterprises.
Saving an Insolvent Company — 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.
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 company's 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 company's profits strong.
Restructuring a company's 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 company's 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 company's 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 company's 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 firm's overall strategy are sold or spun off. Restructuring a company's 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.
The ideal way to restructure a corporation depends on its specific conditions and attributes, as well as the purpose for the reorganization. The following are five company reorganization strategies used to create profitability:
A merger is when another firm takes over an existing company, or a new company is formed by merging two or more existing companies. Though firms in financial trouble commonly employ M&A transactions, there's generally a potential for business synergies that may be generated by uniting the two businesses rather than a result of financial insolvency.
Reverse mergers allow private firms to become publicly traded without the necessity for an initial public offering (IPO). In a reverse merger, a private firm acquires a controlling stake in a publicly-traded company and gains control of the board of directors as a result.
Divestiture is the act or process of transferring ownership of a company's non-core assets to another party. With the sale of one or more of a company's subsidiaries, divisions, or other business units, a company undergoes a significant reorganization.
There are times when it's best for an organization to sell off an unprofitable company line rather than continue to invest in it. In order to avoid bankruptcy, decrease debt, and maintain a low debt-to-equity ratio, companies may use a divestment plan.
A joint venture is the creation of a new firm between two or more companies. Each of the participating firms agrees to provide specific resources and to split the costs, earnings, and control of the new company formed as a result of the collaboration.
With the strategic alliance, businesses may work together while maintaining their own identities in order to generate commercial synergies.
Your business has a lot on its plate. Between managing day-to-day operations and keeping an eye on the big picture, it can be challenging to find the time to address the most significant obstacles your organization faces: corporate restructuring. When it comes to your company's future, you can't afford to put off restructuring any longer. That's why you should turn to Porte Brown, your turnaround expert, for corporate restructuring strategies that will help you navigate today's complex business environment.
The specifics of each company's situation are unique. Contact Porte Brown, top accounting firm in Chicago, to discuss your situation if you are considering a corporate reorganization.
Get in touch today and find out how we can help you meet your objectives.