The Benefits of Restructuring Your Business

Business restructuring

Business owners and company directors should always be looking forward and taking pro-active measures to help their businesses.

If you have carried out cash flow forecasts and the coming months or years are looking difficult then now may be the ideal time to be looking at restructuring your business.

 

What is business restructuring?

Restructuring is a way of changing a company’s operational, legal, or financial structures with the goal of recovering it or to make it more profitable.

When it is in difficulty, restructuring the business often involves setting up a new company with the same directors and shareholders.

The new company then takes over the operations of the old company, while the old company is closed down and its debt is settled.

This is done when the business itself is still viable, but the company itself is not.

While it could be assumed that restructures are only used by struggling businesses, this is far from the case. Restructuring is often used as an essential part of successful business acquisition and growth.

 

 

Why would a business restructure?

Restructuring has the overall aim of improving the operational, financial, legal, or other structures of your business to maximise its profit and to ensure efficient operation.

For the business restructuring to be effective, it will need the joint efforts of business experts, the company management’s team, and key stakeholders.

Restructuring is usually carried out when the company is faced with financial challenges, or during a formal insolvency process such as administration.

For example, when entering into Administration, the business is granted a moratorium which gives it space, time, and legal protection during the process of being restructured.

The business can continue its operation while carrying out a restructuring process (this is only possible when it is not faced with imminent insolvency or litigation).

 

Not just for insolvent companies

However, it is not only a company faced with imminent insolvency that can carry out restructuring. A company might also decide to restructure when there is a need for change.

This can be due to financial reasons or macro and micro-economic factors that can change the way a company operates. Examples can include political issues like Brexit or global pandemics like the COVID-19 crisis.

 

What are the reasons to restructure?

The first step to figuring out which form of restructuring is right for your business is to determine the reason you need it in the first place. Typically, it is down to one of these four reasons:

• Financial distress: Your company is losing money because of costs that are too high and debts are growing to unmanageable levels. All this results in an inability or difficulty to pay creditors.
• Expansion: You are buying another company, incorporating a new business strategy, or developing a different way of working. As such, you need to review your business structure to ensure that efficiency and effectiveness does not slip.
• Management: Expansion and growth have resulted in complex management that could benefit from being simplified, or perhaps entire portions or your business have become redundant.
• Legal compliance: New laws have forced you to review your process or introduce new ones that need to be adopted quickly into your existing structure.

 

Cash flow concerns and restructuring

The lifeblood of any small and medium business is its cash flow. Once this is disrupted, the business runs the real risk of bankruptcy if nothing is done about it. The good news, however, is that even in turbulent times there are steps that the owners, shareholders, and directors of a business could take to promote cash flow.

In the most basic terms the inflow of money into the business must be increased and its outflow reduced.

The first thing to do before exploring restructuring is to save money wherever possible and follow up on outstanding invoices which are yet to be paid to channel in money into the business; you could then also look at potentially obtaining finance which will plug any short term gaps, or better still work on increasing your sales and revenue.

However, if these actions have been carried out and forecasting shows that the business is still going to be in financial difficulty then restructuring may be the best option to pursue.

 

The advantages of restructuring

Restructuring a business doesn’t just reflect the current position of the company but it is a great opportunity for your business as it gives it an opportunity to reposition itself for what businesses may look like going forward or in the future.

Restructuring is usually highly beneficial so there is no need for the company or its directors to avoid the process and there is no hard and fast rule that says a company must continue to operate the way it was founded.

 

Restructuring comes in two main forms:

Financial restructuring: This is most often used when businesses have debts and tax considerations that they are struggling with, it is often necessary to restructure financially to reduce the business liabilities and increase profitability.

Organisation restructuring: This type is used when a business or group’s organisational structure has become inefficient either because of surplus services or complex employee hierarchies.

 

 

Different forms of restructuring explained

There are different types of restructuring and the type used will depend on the reason for being restructured in the first place.

1. Debt restructuring

Debt restructuring is one of the most common motivators that we see for business restructuring. Owing creditors can put the very existence of your company at risk, but there are often steps you can take to reduce your liabilities.

Debt restructuring allows you to renegotiate your company’s debt with creditors. It’s possible to roll all of your outstanding debt into one smaller monthly payment paid back over a longer period. This is often facilitated by using a Company Voluntary Arrangement (CVA), a legally binding agreement between you and your creditors.

If you think you will make profit again in the future, a CVA can provide short-term relief from your debts in return for a guarantee that you will honour them in the future.

Alternatively, you may be able to clear part or all your debts by agreeing a corporate restructure to provide your creditors with equity in your business.

Debt restructuring could also include restarting the company or using an insolvency process call pre-pack administration.

Both of these mean closing the existing business and selling the assets to a new company.

The money realised by the sale of the assets means that creditors can be repaid at least some of what they are owed. These processes also mean that jobs could be saved. Crucially a company restart can also be used when they may be very little in the way of assets to realise.

 

2. Cost reduction

If your business is facing a growing amount of debt, it is likely that its running costs are too high. In these situations, reviewing your company structure, or simply reviewing the basics, can highlight overspend, whether in the administration or operational side of your business.

To reduce costs, you may consider selling unneeded assets to realise cash, reducing the number of employees, or restructuring individual departments to remove unnecessary management costs.

Business simplification and streamlining is one of the more common ways restructuring can be carried out. By identifying and shutting down the departments or costs that are not necessary, or profitable will allow a business funds or resources to be channelled into areas that are more beneficial to the business. This process both reduces and maximises cost as well as increases the efficiency of the business.

A company that has been effectively restructured, is supposed to have increased resilience enabling it to be well prepared for the future.

 

3. Mergers and acquisitions

One of the best ways of increasing profitability in a business quickly is to incorporate an existing company into yours. This can come in a variety of forms, from buying a business outright to merging with one and absorbing their assets.

Mergers and acquisitions (M&A) can allow a business to rapidly increase your revenue, production capacity and market reach, all without the time and hard work of building a new company.

Mergers and acquisitions have their own variety of structures based on the relationship between the businesses involved. For example, horizontal mergers describe the process of two companies in direct competition coming together, while vertical mergers could take place when a company buys a supplier or complimentary business to expand service offerings.

 

4. Divestment and spin-offs

If M&As exist for companies that want to grow, divestment and spin-offs are useful for businesses that are looking to consolidate. They are usually used in larger businesses. Where part of a business unit, for example manufacturing factory in a largely service based business, is no longer profitable or fulfilling a strategic purpose, it could be sold to raise capital or simply closed to save on running costs — this is known as divestment.

If you want to reduce your involvement in a business unit without entirely stepping away from it, a spin-off can be a better solution. This involves restructuring the unit to become its own standalone company which you still have a stake in. This can be particularly useful if you want to achieve a high valuation on part of your business.

 

5. Legal restructuring

In some cases, corporate restructuring may be necessary not because a business is struggling, but simply because there is a shift in responsibilities at the top.

This could include adding new investors or a change in the ownership structure.

 

Get free advice today

The restructuring process could put your company in an advantageous position. A position that will mean that it can carry out its activities effectively and efficiently when this whole pandemic is over.

If you think that your business is likely to struggle financially in the near future get in touch today as it will likely increase the options available. We have a Business Rescue Team with business turnaround experts and licensed insolvency practitioners who are ready to walk you through the process of restructuring your business.

Call the team today to schedule a free initial consultation with any of our restructuring specialists on 0800 975 0380.