Why and When Do Companies Restructure Their Business?

America’s popular retailer JC Penney with over 840 locations across the USA and with a history of 100 years announced bankruptcy during the pandemic.  During its heydays, it was known as a budget department store where people flooded looking for irresistible bargains and discounts. It’s inability to restructure the market during the pandemic lead to its downfall.

Yet another company that is also popular in the UAE and around the world is Gold Gym, which was well-established and known for its high standards in the training and fitness sector worldwide. It has been in authority for more than 50 years but shut down many facilities during the pandemic as it seemed unviable to operate the business at its existing capacity. Later it also filed for bankruptcy and was acquired by German fitness group RSG Group.

These scenarios are perfect examples of why business restructuring needs to be implemented at the right time and strategies need to be reassessed with utmost care and clarity.

You will understand what is business restructuring and when to consider business restructuring here.

Business restructuring can be carried out either for a specific function (finance and tax restructuring, legal, operations structuring, sales restructuring, staff turnover) or across the organization. Functional level restructuring happens more frequently as compared to business level restructuring.

You will typically reorganize your assets and liabilities as part of business restructuring.

Some common reasons why businesses consider restructuring are:

1. Financial distress: If the business’s trends have been inconsistent for over a period and not in line with the company goals then it is time for financial restructuring. Also, most companies consider restructuring at the eleventh hour and this leads to a business downfall.  Restructuring is an expensive affair, and it is best to carry it out before it becomes a necessity or a requirement else it is pointless and leads to lots of confusions and high costs, which can lead to bankruptcy.

 2. Debts are over leveraged: Often businesses tend to have excessive debts and continue to borrow funds to save the business that is at the brink of a downfall. Debts don’t mean much without strategizing and controlling the areas where you need to leverage your funds. Also, it is vital to keep the debt ratios in check.

3. Changing markets:  Keep a close eye on the industry for your products and the economic conditions. Have a business continuity plan in place to cope with pandemic or slow economic conditions. Use the lagging and the leading indicators to stay prepared for the future before the crisis unfold.

4. Mergers, acquisitions and consolidations: Mergers, acquisitions and consolidations are scenarios when business restructuring is considered.

M&A have their own variety of structures based on the relationship between the businesses involved.  Two types of company mergers are: Horizontal and vertical mergers

Horizontal merger is when two or more companies engage in manufacturing the same products merge together. A classic example is the HP and Compaq merge in 2011. A vertical merger is when a company acquires another company that operates in the same supply chain.  For instance, an automobile company joining hands with a spare parts supplier is a vertical merger.

Acquisition is when one company acquires a major stake in another company and the other company retains its name and legal structure most times. For instance, the Amazon and whole food merger, where whole food still operates under the same brand name.

Consolidation results in the formation of an entirely new company where the stockholders of both the companies approve the consolidation and receive common equity shares in the newly formed entity. For example, in 2018 Harris Corp. and L3 Technologies Inc. came together under the new handle L3 Harris Technologies Inc.

It is imperative to ensure that you take a collective decision with all the leaders’ opinion and not lose sight of your company’s goals and objectives while keeping in mind that restructuring is not the solution for all business problems.

Before you restructure your company, understand if the issue requires functional specific restructuring or if it requires overall business restructuring at an organizational level.

Many times shrinking profits or identifying inefficiencies are not good enough reasons for business restructuring. It is significant to consult with a professional and then consider restructuring as it involves massive, time, cost and expenses.

If the management has been incessantly discussing about business restructuring before you proceed or halt the restructuring plan, it is vital to get an expert’s opinion; concept evaluation, business solutions, implementation plan and milestones. Also, the expert to have an in-depth understanding of the existing systems and previous performances before recommending personalized solutions.

5. Divestment and spin-offs: Divestment is the process of selling some of the business assets for multiple reasons and spin-offs is the process of converting a subsidiary into a new company.

6. Create a tax-efficient corporate structure: Many businesses also consider business restructuring to leverage on the new tax policy. Your financial advisor should guide you to reduce your tax liabilities by leveraging on the current policies and tax saver options.

7. Succession planning: In case of family businesses when leadership roles are transitioned from one generation to another then the incoming leader and the outgoing leader consider restructuring as their ideas could be diverse and conflicting. They discuss and form a new structure based on the outgoing leader’s experience and knowledge and the incoming leader’s futuristic plans and ideas.

In the recent pandemic times some of the top reasons for restructuring are due to:

1. Change in the management team

2. Plans to enter into a different industry

3. Plans to reorganize debt and operations

4. Filing for bankruptcy and reorganizing with court protection

Out of court restructuring is when company reorganizes its debts with creditors without filing for bankruptcy. A financial advisor is hired for owners to restructure their debt with secured and unsecured creditors. This could also include strategies to raise capital funds for the business.

There are numerous reasons for non-performance. Before you devote significant resources for business restructuring, you should consider the probability of whether increasing cross-functionality and synergies within the organization can resolve the issue. Unless you address the micro level issues, no amount of macro level changes would be effective.

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