Why would a business restructure?

In order to survive, businesses need to be responsive, agile, vigilant and, in a perfect world, able to anticipate issues before they materialise.

One of the ways in which businesses might avoid or respond to challenges is by restructuring. For instance, if one business buys another, restructuring may be necessary to bring the two businesses together under a single point of leadership or to ensure that systems and processes can overlap and communicate between the two business entities.

Restructuring can take many forms and guises. It may involve a demerger and separating streams of income; moving assets within a group; re-allocating resources; or consolidating aspects of the business. Whatever the form, when restructuring, it’s important to ensure that you engage a team of professionals that can collaborate together with your broader commercial objectives in mind.

Restructuring is often associated with insolvency, but this isn’t always the case. Business restructuring can take place for many reasons and could be to increase profitability as much as to avoid liquidation or discard outdated business models.

Whatever the goals, restructuring is no small task and demands no small amount of risk-taking and needs technical expertise to execute.

What is the objective of business restructuring?

The core objective of a company restructure is to change the way a business operates in some way, be it legally or in terms of company organisation. Usually, the biggest motivator of a restructure is financial, but a restructure could also take place to prepare a business for a takeover or merger. It’s not unusual for restructuring to take place in advance of a business sale to either make a business more attractive to a buyer or to remove assets from the trading entity.

A business restructure can be positive or negative in nature. It may be that a business has been performing well and wants to restructure to foster further growth. Conversely, a business could be struggling after poor sales or a dramatic shift in the market it occupies and needs to restructure in order to keep going – even if in a different form.

The specific goals of a company restructuring must be established early if the restructure is to make a tangible impact on the business.

While those objectives aren’t always to cut parts of the business, there may be hard decisions to make, such as laying off staff or discontinuing products or services. Whatever the motivations are for restructure, you need to ensure that you seek expert advice before undertaking the restructure so that you are fully appraised of any pitfalls and legal complications that may arise.

This is particularly crucial when a restructure involves employees.

When should you restructure your business?

A business restructure isn’t an emergency measure reserved for financial recovery, and a business can theoretically restructure whenever its key stakeholders choose. However, the first and best warning signs of a necessary restructure is usually that the business may struggle—or even outright fail—to continue with its present structure.

Key performance indicators (KPIs) are a good metric of whether a business is performing satisfactorily. If a company is failing to meet its KPIs consistently, its leadership team should first investigate why these targets are being missed. It could be that something can be changed internally that addresses the problems with little upheaval.

Otherwise, problems within a business can run deep and be too closely integrated with the business’s structure to be remedied quite so easily. In those circumstances, it may be that a business restructure is needed to ‘wipe the slate clean’ and allow the company to orient itself in a way that’s more conducive to its goals.

In the process, it may be able to cut costs, simplify processes, and downsize departments for easier management.

There’s no set point at which a business must restructure, and indeed some businesses may never come to a point where a restructure feels necessary.

However, it’s not at all an uncommon step for a company to take, which is why you can find help with business restructuring when the time comes. Additionally, a business can be perfectly healthy and profitable and still seek a restructure. Many businesses may choose to undergo restructuring to capitalise on strengths or opportunities, despite a lack of threat from difficult markets or losses.

Whatever your reason for restructuring, you need a team of professionals who can support you not only with the commercial goals – but also understand the ‘bigger picture’ and implement the restructure with your requirements in mind. There may be various options open to you, and you need to ensure that you understand the accounting, tax and legal implications of all of the options (as well as costs) so that you can make an informed decision before implementing the restructure.

How do you restructure a failing business?

There are numerous forms of corporate restructuring, some which leave the business unchanged from the outside and others which may completely redefine a company and see it joining with another.

Some ways in which a business can restructure include:

Mergers and acquisitions

This concept will be familiar to many, as businesses acquiring and merging with others is a commonplace occurrence in the marketplace. There are many reasons that one business may choose to purchase another:

• To expand product ranges and offerings
• To acquire beneficial assets
• To grow the primary business and expand its reach

Alternatively, two businesses may merge ‘horizontally’, meaning they choose to instead combine their efforts and cooperate.

Though mergers involve complex restructuring for the businesses on either side, it allows each to support gaps in the other’s products, services, and processes while removing a source of competition from the market.

Demergers and spin-offs

Demergers and spin-offs are similar to mergers —but they are a reverse version of the process. Where mergers bring two or more businesses together to cooperate, a demerger or ‘spin-off’ sees a company separating a part of its operation into a standalone business unit that operates with some degree of independence.

Businesses might choose to do this to simplify operations in the ‘core’ unit that remains after the spin-off while retaining some involvement with a still-profitable aspect in the form of the spun-off unit. Most commonly, it is undertaken with a view to preparing to sell a particular aspect of the business.

Conversely, a company restructure might take the form of a divestment, which would see a part of the business sold off or shut down. This might be carried out on that part of the business that has been deemed unprofitable or too complex to keep running and helps the business to consolidate what remains. If the upkeep of the divested unit exceeded its profits, it may even help the company ease financial haemorrhaging.

Sales of business assets can also help to recover cash in the process. However, in order to do this first, a demerger is often required in order to separate aspects of the business and ensure that the right framework is in place before the sale.

Legal Restructuring

Whatever the restructure being undertaken, ensuring that you have the right documentation in place to affect the restructure is key. This may involve demerger agreements and complex contracts, ancillary corporate documents and returns for Companies House. But it may also involve settlement agreements, property transfers and amendments to terms and conditions of trade to ensure that they support the new structure being affected. Failing to do this can result in a misalignment in the practice of the business and the underlying legal structure, which could result in misunderstandings and, worse, unnecessary and avoidable claims.

As a business grows in size and significance, this can be particularly important and structuring the business properly from a legal perspective and ensuring that the legal documents underpinning any restructure are properly prepared can allow it to establish itself and grow accordingly.

Debt restructuring

A business that becomes insolvent, and is unable to pay off its debts, may need to consider debt restructuring to manage its overdue payments and avoid administration or liquidation.

Debt restructuring involves communicating with creditors so that a new system can be put in place, one that doesn’t prevent the creditors from being repaid but one that staggers the demand on the debtor.

One such system is a company voluntary arrangement (CVA), which sets up an agreed rate of repayment that satisfies the creditors while being more manageable for the company which owes money.

Alongside debt restructuring, a business might also undergo cost restructuring to downsize expenditure and make debt repayments more manageable and, therefore, more likely to be fulfilled.

What are the outcomes of restructuring?

Depending on the reasons for restructuring and its implementation, the specific outcomes of a business restructure might be a smaller or larger business, a separate business entity, greater profitability, and other results.

Ultimately, the outcomes of restructuring should lead to a business which is less complicated, more streamlined and efficient, and on a healthier course for success.

What are the advantages of business restructuring?

The potential benefits of restructuring a company are numerous. Some of these include:

Increased profitability

Perhaps the most significant and sought-after outcome of a business restructure, becoming more cost-effective, is usually a benefit that comes about indirectly, if not directly. Even if the specific goal of a restructure isn’t to decrease costs or heighten profits, measures like divesting a part of the business or reducing headcount can lead to just that.

Greater efficiency

Restructures present the perfect opportunity to increase the overall efficiency of a business. This can be achieved even with minor changes, such as consolidating job roles and removing redundant processes.

Additionally, a company restructure can be an opportune time to give employees more autonomy in their work or access to better tools, thereby passively increasing efficiency and removing barriers to work.

More favourable perception

When a business merger takes place, the companies that join together often compete in the same market and, therefore, for similar audiences. By coming together, the need for customers to choose one or the other is eliminated.

Not only is this beneficial for the businesses involved, but it also presents convenience and a simplified consumer experience for the customers. Accordingly, this kind of restructure can delight customers and lead to a more favourable perception of the newly merged business than that held by any of the previously standalone businesses.

The improved offering of products or services is also likely to garner a favourable opinion from customers.

More cohesive structure

The opportunity to restructure a business grants the chance to organise its assets, processes, and various moving parts into more straightforward and transparent structures. This can facilitate fresh thinking, removing constraints put in place by previous leaders and finding new ways to achieve tasks.

The tools available to businesses evolve in very short spaces of time, and the software and systems that held up processes previously may be replaceable with hugely improved alternatives that can make the business more efficient overall.

A business restructure is the perfect time to remove clutter and simplify.

What is an example of restructuring in business?

A commonly seen example of business restructuring is mergers and acquisitions, the latter of which is particularly common in the age of corporate giants such as Amazon, Microsoft, and Alphabet (Google’s parent company).

As these huge businesses look to expand their product and service offerings, it is often simpler to buy an existing company and absorb its assets.

A specific example of significant restructuring from the UK high street is the joining of Currys and PC World, which both operated in the electronics retail market but with mostly different offerings.

This itself followed on from acquisitions by Dixons Retail, which restructured into Dixons Carphone and managed all brands under single points of contact and management.

Restructures like these—bringing together businesses that operate in similar niches and consolidating them under one umbrella—can make the resulting company a big presence in its sector, greatly increasing their influence and setting them up for greater profits.

But the notion of restructuring isn’t exclusive to the corporate giants. Many businesses within the SME (small to medium-sized enterprise) market undertake restructures and acquisitions to enhance and streamline their businesses.

How do companies deal with restructure?

Despite the benefits of restructuring a company, they are complex and demanding transitional periods for the businesses that undertake them. The businesses involved often don’t want to—or cannot—stop their normal operations while the necessary work for the restructure takes place.

At the same time, restructures can involve protracted and complicated legal matters to untangle due to the various strands of buying shares, taking new ownership of assets, transferring legal ownership of businesses, and drawing up new contracts.

For this reason, businesses will seek the help of corporate and commercial law experts, who can guide them with professional competency and knowledge. This gives the business leaders a source of expert guidance and advice and a team that they can rely on to move processes along and satisfy the legal requirements.

As well as avoiding pitfalls and costly mistakes, this also means that the restructuring process is completed in the shortest amount of time possible, putting the company back on track to benefit from its restructure and enjoy its increased market reach, smoother processes, and other benefits gained by the move.

How to restructure your business

Looking to take the first steps into a business restructure?

Our team at Wilson Browne Solicitors has a friendly, down-to-earth approach that we combine with expert knowledge and guidance. We understand business structure intricately and can guide you through any stage in your restructuring journey.

To find out more and talk about our services, contact our advisors on 0800 088 6004 or send us a contact form today.