What is Corporate Restructuring and Turnaround?October 14, 2020
As we enter into a second national lockdown, the effect of Covid-19 shows no sign of loosening its grasp on the economy and the businesses that fuel its fire.
Organisations are having to adapt, and some are even having to completely restructure the way they operate in order to stay afloat.
Let’s take a look at an imaginary bustling Glasgow nightclub as a representative of what many businesses are currently experiencing.
This nightclub is one of a number of distressed companies facing uncertainty over its future as a result of financial difficulties caused by the Coronavirus pandemic.
As liquidity concerns mount, the nightclub owners have been in touch with a licensed Insolvency Practitioner (IP) to assess their options going forward.
Despite facing significant financial challenges and emotional turmoil, the struggling nightclub owners have been afforded a glimmering hope of survival. After a productive chat with the IP, they have been advised to go down the line of Corporate Restructuring in an attempt to salvage the business.
As a last ditch effort to save the company from insolvent liquidation, the owners held a meeting with key stakeholders and influential creditors to ask for their support on the businesses’ restructuring plan.
Their survival pitch to the creditors focused on a reorganisation strategy of the company’s debts that may involve the company selling off certain non-essential assets to keep the business alive.
They also reiterated that corporate restructuring can help struggling businesses manage their debts, assets and liabilities more effectively with the aid of financial and legal advisors to assist in the nitty-gritty side of things.
In this article we’ll break down exactly what corporate restructuring is, why a company might consider it, and what different types of corporate restructuring strategies exist.
What is Corporate Restructuring?
Corporate restructuring is the process whereby companies reorganise their capital structure with the objective to make it better organised and more profitable.
The essence of corporate restructuring is to eradicate the financial troubles, while simultaneously improving the performance of a business.
In most cases, corporate restructuring ensues when a corporate entity is in crisis management mode, but it’s a common misconception to think that corporate restructuring is purely tailored to struggling businesses - this is not always the case.
For many businesses, corporate restructuring is considered an integral part of their business growth and capital acquisition which is why so many struggling businesses adopt the process to turn their fortunes around.
The process begins when the management team of the restructuring entity hires financial and legal advisors to guide the company through legal negotiations and asset deals.
Typically, corporate restructuring involves:
- The refinancing of company debts and liabilities.
- The reorganisation of business operations.
- The sale of company shares to interested investors.
Debt repayments are usually spread out over a longer period of time with smaller payments being agreed. This ensures that the corporate entity restructuring has the capital to meet its credit obligations.
Corporate restructuring is also the means by which a company prepares itself for a change in ownership through strategies such as mergers, joint ventures, buyouts or spin-offs which we’ll come back to later on in the article.
The Role of the Creditor
In the process of restructuring, creditors have a major role in dictating the fate of a business.
Without the unmitigated support of major creditors, the restructuring entity faces an uphill battle to keep the business afloat and avoid any formal insolvency procedures.
An agreement between the company and both secured and unsecured creditors must be made to prevent the creditors from taking a number of actions including:
- Making any demands for payment.
- Enforcing security over their assets and liabilities.
- Initiating any formal insolvency proceedings.
If a company fails to have the backing of its creditors over these key actions, the restructuring process has the potential to turn sour if disgruntled creditors start to disagree with elements of the process.
Creditors may also agree to commute some of the company’s debt for a portion of equity. Equity refers to the amount of money that would be returned to the shareholders if all of the company’s assets were liquidated - giving creditors a degree or residual ownership in the company.
What Types of Corporate Restructuring are there?
There are two main types of Corporate Restructuring:
Financial restructuring applies to businesses who have made the decision to restructure the way they operate as a result of cash flow and overall sales issues.
In this instance, companies want to reduce their debts and increase profitability as quickly as possible, while stakeholders such as debtors and lenders want to protect their position to the company.
Financial restructuring can take the form of equity swaps, debt restructuring schemes, winding-up petitions, and joint ventures to name a few.
Organisational restructuring, on the other hand, refers to the reorganisation of a company’s structural arrangement as opposed to a financially induced restructuring.
This could involve the restructuring of a businesses’ hierarchical structure in the aftermath of a merger/amalgamation or downsizing the number of employees within the company.
Organisational restructuring is initiated to cut down on inefficient, surplus costs or to pay off any outstanding debts the company might have incurred.
Types of Corporate Restructuring Strategies
Businesses have a whole host of options when it comes to navigating a corporate restructuring.
Whether its a debt restructuring scheme or a hierarchical power move, corporate restructuring strategies serve an important purpose in the operation of a profitable business.
Companies have the option of implementing the following corporate restructuring strategies:
Mergers and Acquisitions
One of the most effective and quickest ways to increase the profitability of a struggling business is for it to combine forces with one or more business entities.
A merger can be completed by amalgamating an existing company into your own business and absorbing their assets, buying a business outright or by forming a new company.
Mergers and acquisitions are differentiated based on the relationship between the parties involved. Horizontal mergers best describes the coming together of two or more companies who are in direct competition with each other, while a vertical merger is associated with a larger company buying a smaller supplier to reduce competition.
On the flipside, a demerger occurs when a large company separates into two or more separate companies - this may be the dissolution of a previous merger.
Divestments or ‘divestitures’ are the opposite of an investment in the way that a corporate entity sells or liquidates an asset rather than investing or buying one.
A direct sale to an external buyer or a subsidiary spin-off are the typical methods of divestment within a company. This usually takes place when businesses are experiencing a poor Return On Investment (ROI) and they have to consider selling or closing it to compensate for the losses and inefficiencies.
Spin-offs involve restructuring a business unit or division as its own separate entity. Although the original company still owns part of the unit, shares are distributed amongst the businesses’ existing shareholders equally.
This ensures that the new company has the same shareholder base as the original, with a completely different hierarchical structure and workforce.
This is a great option for businesses that have a high-performing unit that is maybe being dragged down by another department/division in the company.
When one separate entity is formed by two or more different companies, you have yourself a joint venture.
All of the companies involved in the joint venture must agree to contribute to the entity equally, as well as sharing overheads, revenues and company control.
Company Voluntary Arrangement
A company voluntary arrangement (CVA) is a debt restructuring tool designed to help struggling businesses.
A CVA allows a business the opportunity to repay its creditors over a fixed period of time as long as 75% of the company’s creditors vote in favour of the proposal.
If you manage to convince creditors of a more profitable future, and the CVA is approved, your business can be offered a touch of breathing space in terms of debt repayment.
Why might a company consider Corporate Restructuring?
In order to initiate a solid corporate restructuring action plan, businesses must establish the reasons they are reorganising in the first place.
We have highlighted a few of the most common factors that persuade businesses to restructure:
We’ll start with the most obvious one. The majority of businesses consider a restructure when their sales/profit figures are poor and unsustainable. If standards continue to slip, and sales continue to fall it becomes increasingly more difficult to pay creditors.
Change in Strategic Direction
Whether it’s expanding your empire through a takeover bid or utilising your prized asset as a spin-off, incorporating a new business model/strategy can really invigorate a company’s performance if done efficiently.
The evolution or introduction of new laws may force a company to review its structure and processes to accommodate the new changes.
Management adjustments can bring with them a transformational change within the company. The development of the digital age combined with the limitations Covid-19 has potentially changed the management hierarchy structure for years to come.
Get in Touch
If your company is going through a difficult period financially, there’s no better way to put your mind at ease than having a chat with one of our licensed insolvency practitioners.
At 180 Advisory Solutions, we have a friendly team of professionals with a wealth of experience in helping businesses bounce back from the brink of insolvency.
If you have any questions or queries regarding insolvency and corporate restructuring as a potential avenue, please don’t hesitate to contact us as soon as possible.