Corporate Restructuring: What It Is, Its Different Forms, and Why Businesses Do It

Business consulting

Business consulting

The words “corporate restructuring” can spur feelings of anxiety and uncertainty in businesses and employees. For many, it indicates that unpleasant changes like layoffs or cost-cutting measures are afoot. While it’s true that corporate restructuring often happens during times of economic downturn or financial trouble, that’s not always the case.

A company might choose to reorganize and rethink the efficacy of its operations simply because its current way of doing things isn’t working. And in being proactive and opting to undergo corporate restructuring (either by enlisting the help of business consulting services or through internal efforts), it can start over and chart a new path to its goals.

What Is Corporate Restructuring?

Restructuring is the process undertaken by a company to change its financial and operational standing significantly. This might be reconfiguring its hierarchy, internal structure or operations to achieve certain aims like mitigating losses and enhancing its overall performance.

What Are the Different Types of Corporate Restructuring?

The type of restructuring a business may pursue will differ based on its unique situation and what it intends to achieve. That said, here are the most common approaches to corporate restructuring:

1. Organizational Restructuring

Organizational restructuring involves altering a business’s internal hierarchy. This process may result in redesigning or merging job positions, downsizing the workforce and modifying reporting relationships.

2. Operational Restructuring

Operational restructuring is the practice of scrutinizing everyday processes and looking for angles to streamline and improve them. This could be done through tactics like adopting automation technology, taking advantage of outsourcing services to delegate specific tasks for cost savings, and eliminating redundant workflows.

3. Financial Restructuring

This type of restructuring may take place as a result of a business’s poor sales performance, unstable cash flow, high operating costs, debts, or changing market conditions. Some forms of financial restructuring include:

  • Debt restructuring: Involves consolidating debts, negotiating lower interest payments for loans and replacing high-cost debt with more affordable borrowings.
  • Equity restructuring: Focuses on reorganizing a company’s equity capital to stave off overcapitalization (when earnings don’t support the return on securities issued) or undercapitalization (when a business’s capital is less than the borrowed capital). It entails strategies like purchasing shares from shareholders directly to lower a company’s liability to its shareholders and strengthen its financial footing.
  • Debt-equity swaps: An arrangement where a company exchanges some of its outstanding debts to its creditors for equity to sustain the feasibility of its operations.

Why Do Companies Restructure?

There are several reasons why businesses choose to undergo restructuring, some of which include:

1. Mergers and Acquisitions

Mergers and acquisitions (M&As) involve two companies coming together to create a single entity. As a result, one or both businesses will need to restructure their operations to integrate efficiently. This may involve eliminating roles with similar functions, merging departments and combining resources to achieve complete synergy.

For example, after M&As, a business might not need two separate marketing teams. In such cases, they might choose to reconfigure their internal hierarchy and have a single, unified marketing team either by removing duplicate positions or merging them to reduce redundancies and save costs.

2. Stagnating Profits

A company might not be performing as expected due to economic circumstances, such as inflation or high interest rates, or internal factors like ineffective processes, poor sales performance and extreme operational costs. To turn its fortunes around, a company might opt to restructure its assets and capital.

For instance, with the help of a competent corporate consulting firm, a business might consider selling or spinning off underperforming or non-core assets, divisions or subsidiaries to focus on its core competencies and course-correct toward profitability. This is what’s also known as divestiture.

3. Shareholder Conflicts

As smooth as most corporations wish it could be, joint ventures, partnerships or mergers can sometimes hit snags that spawn disputes between owners. These might result from differences in vision or management styles, clashes over decision-making authority or misaligned objectives.

If these conflicts escalate to the point of no reconciliation or the parties involved decide to go their separate ways, then a restructuring may be inevitable.

Shareholders dissolving partnerships and starting anew under a different organizational structure can be an effective way to remove contentious stakeholders, quickly address conflicts while keeping day-to-day operations intact, and mitigate any adverse impacts on company morale and reputation.

4. Cost Savings

Cost savings are the leading cause for most corporate restructuring efforts. In looking at the types of restructuring, you’ll notice that many approaches are centered around cutting costs, even if not stated explicitly.

For example, practices like bringing in new technologies to accelerate task completion times and outsourcing ancillary tasks at a much cheaper cost than in-house roles like human resources and customer support are all aspects of operational restructuring that bring down overhead expenses. Similarly, consolidating multiple companies into a single holding lowers administrative and compliance costs, such as financial reporting, legal fees and taxes.

In both cases, the primary goal is to make operations leaner by minimizing costs and increasing efficiency.

5. Financing Opportunities

A company’s desire to raise capital may also drive it to restructure. In the process of due diligence, potential venture capitalists and private equity firms scrutinize a company’s operations to gauge its financial health and prospects. For an owner to secure funding at favorable terms, all aspects of the business must be in good shape. This means a clear organizational hierarchy, no operational bottlenecks, and minimal financial debt, among other things.

As such, owners might restructure in a bid to make their businesses more attractive to investors. In this context, restructuring may entail tactics like bringing on board experienced executives and managers, implementing stricter corporate governance, and restructuring existing debt to make the company more financially viable.

6. Succession Planning

In a scenario where a founder plans to step down or retire, they might initiate procedures to transfer ownership to family members, board of directors members or senior executives.

Here, reconfiguring ownership to ensure continuity in leadership and a seamless transition of power is crucial. Restructuring can help minimize disruption during the handover process by defining roles and responsibilities, setting up a new organizational structure, and outlining revised equity stakes, if necessary, to secure the business’s longevity and cement the legacy of the outgoing founder.

Restructuring for a Stronger Company

Most businesses are resistant to change. But as they evolve, it might not be feasible to continue operating as they always have. You’ll always have to adopt a broader perspective and reconcile your company’s immediate needs with its future objectives. And if restructuring is the answer to reconnecting those two and remaining steadfastly competitive and resilient, then that’s what you need to do.