Restructuring of Business
Introduction
Corporate restructuring is an action taken by the corporate entity to modify its capital structure or its operations significantly. Generally, corporate restructuring happens when a corporate entity is experiencing significant problems and is in financial jeopardy.
Usually, the concerned entity may look at debt financing, operations reduction, any portion of the company to interested investors. In addition to this, the need for corporate restructuring arises due to the change in the ownership structure of a company. Such change in the ownership structure of the company might be due to the takeover, merger, adverse economic conditions, adverse changes in business such as buyouts, bankruptcy, lack of integration between the divisions, over-employed personnel, etc.
- To improve the Balance Sheet of the company (by disposing of the unprofitable division from its core business)
- Staff reduction (by closing down or selling off the unprofitable portion)
- Changes in corporate management
- Disposing of the underutilised assets, such as brands/patent rights.
- Outsourcing its operations such as technical support and payroll management to a more efficient 3rd party.
- Shifting of operations such as moving of manufacturing operations to lower-cost locations.
- Reorganising functions such as marketing, sales, and distribution.
- Renegotiating labour contracts to reduce overhead.
- Rescheduling or refinancing of debt to minimise the interest payments.
Financial Restructuring
This type of restructuring may take place due to a severe fall in the overall sales because of adverse economic conditions. Here, the corporate entity may alter its equity pattern, debt-servicing schedule, equity holdings, and cross-holding pattern. All this is done to sustain the market and the profitability of the company.
Organisational Restructuring
Organisational Restructuring implies a change in the organisational structure of a company, such as reducing its level of the hierarchy, redesigning the job positions, downsizing the employees, and changing the reporting relationships. This type of restructuring is done to cut down the cost and to pay off the outstanding debt to continue with the business operations in some manner.
Merger: This is the concept where two or more business entities are merged together either by way of absorption or amalgamation or by forming a new company. The merger of two or more business entities is generally done by the exchange of securities between the acquiring and the target company.
Demerger: Under this corporate restructuring strategy, two or more companies are combined into a single company to get the benefit of synergy arising out of such a merger.
Reverse Merger: In this strategy, the unlisted public companies have the opportunity to convert into a listed public company, without opting for IPO (Initial Public offer). In this strategy, the private company acquires a majority shareholding in the public company with its own name.
Disinvestment: When a corporate entity sells out or liquidates an asset or subsidiary, it is known as “divestiture”.
Takeover/Acquisition: Under this strategy, the acquiring company takes overall control of the target company. It is also known as the Acquisition.
Joint Venture (JV): Under this strategy, an entity is formed by two or more companies to undertake financial act together. The entity created is called the Joint Venture. Both the parties agree to contribute in proportion as agreed to form a new entity and also share the expenses, revenues and control of the company.
Strategic Alliance: Under this strategy, two or more entities enter into an agreement to collaborate with each other, in order to achieve certain objectives while still acting as independent organisations.
Slump Sale: Under this strategy, an entity transfers one or more undertakings for lump sum consideration. Under Slump Sale, an undertaking is sold for consideration irrespective of the individual values of the assets or liabilities of the undertaking.
Conversions: An entity could be converted into other forms to suit it needs i.e., a loss making company could be converted into an LLP to gain the benefits of reduced compliances, costs, etc.
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Frequently Asked Questions
There is no legal maximum or minimum number of times you can restructure, or how often. However, going through the restructuring process involves a lot of documentations, regulatory approvals, etc. So it’s better to have a legal and professional consultant by your side, to go through the same.
Restructuring company organization and financial assets through inorganic growth strategies 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.
No, restructuring is a process of changing the way work is done or services are delivered by the business so it can best meet its objectives. It focuses on the roles doing the work but it doesn’t necessarily mean roles are made redundant. It can involve creating new, additional roles, or making changes to existing ones.
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