Corporate restructuring refers to reimagining and reviving the capital structure and operations of the corporate entity. The need for this restructuring arises when the corporate entity faces significant challenges and financial loss. In simpler terms, this process is to get off financial crisis by improving the company's efficiency, productivity, and overall performance.
CAAQ's consulting expertise assists you to come across financial losses and bring your business back on track. We're a team of hybrid professionals that has CA, CS, and legal advisors to help you with the best advisory. Our experienced team suggests you smartly negotiate and make a merger and acquisition deal seamlessly. Typically, the concerned entity thinks of debt financing, staking, & operations revamping. Sometimes, the change in ownership structure can also require this restructuring. This can happen because of a takeover, merger, adverse economic conditions, and adverse changes in business like buyouts, bankruptcy, or over-employed personnel, etc.
Types of Corporate Restructuring
- Financial Restructuring
It becomes a must-to-do when overall sales immensely slash down because of adverse economic conditions. This condition can be addressed by changing the equity pattern, debt servicing schedule, equity holdings, and cross-holding patterns. Taking these steps can bring sustainability to the market and profitability of the company.
- Organisational Restructuring
This type of restructuring refers to a change in the internal organisational structure of a company. The reason can be reducing its level of the hierarchy, redefining the job positions, downsizing the employees, and making changes in the reporting relationships. These practices can help in cutting down cost and paying off outstanding debts. This is how the funds are managed to keep business operations on the right track.
Why Corporate Restructuring Takes Place
This reconstruction of a corporation takes place in the following situations:
- Change in the Strategy
The distressed business entity may do plus and minus in its divisions and subsidiaries that are not aligned with the core strategies. These divisions or subsidiaries may not fit in the company's long-term goals. Therefore, it focuses on strategising and disposing of those assets to the upcoming buyers.
- Lack of Profits
This situation arises when the undertaking may not be making sufficient profit to cover the invested capital and also causing financial losses. Some wrong decisions can be the cause of its unworthy performance. Sometimes, it happens because of a change in customers' needs or inflation.
- Reverse Synergy
When the value of merged units exceeds the value of individual units, the situation of reverse synergy emerges. It causes divesting of the company's assets. The reconstruction may save the company by divesting a division to a third party with the hope of drawing more value.
- Cash Flow Requirement
Disposing of an undertaking that is not a cash cow can convert it into so. The cash will start inflowing. This approach is ideal if the corporate entity is facing challenges in raising funds for reducing debt.
Characteristics of Corporate Restructuring
To improve the Balance Sheet of the company (by disposing of the unprofitable division from its core business)
- Reducing staff (by winding up or selling off the unprofitable portion)
- Changes in corporate management
- Disposing of unproductive assets, such as brands/patent rights.
- Hiring a third party for cost-effective operations such as technical support and payroll management
- Shifting of operations such as offshoring or near shoring manufacturing operations where the cost is low
- Revamping functions such as marketing, sales, and distribution.
- Renegotiating labour contracts to reduce overhead
- Rescheduling/ refinancing debt to cut down the interest payments
- Conducting a public relations campaign at large to revive the company
Important Aspects in Corporate Restructuring Strategies
Legal and procedural issues
- Accounting aspects
- Human and Cultural synergies
- Valuation and Funding
- Taxation and Stamp duty aspects
- Competition aspects, etc.
Types of Corporate Restructuring Strategies
It is the concept of combining two or more business entities together via absorption/ amalgamation/ a new company formation. This practice is generally performed by exchanging securities between the acquiring and the target company.
In this strategy, two or more companies combine to form a single company to leverage synergy arising out of such a merger.
- Reverse Merger
This strategy is apt for the unlisted public companies, which can convert into a listed public company without an IPO (Initial Public offer). It ensures the private company to obtain a major shareholding in the public company with its own name.
The practice of selling out or liquidating an asset or subsidiary is called disinvestment or divestiture.
Obtaining full control of the target company is called acquisition. This strategy ensures a takeover to reconstruct the business.
- Joint Venture (JV)
This strategy ensures the formation of an entity through two or more companies by undertaking financial acts together. The resulted entity is called the Joint Venture. In this case, both parties agree to contribute capital in any proportion. They may also share the expenses, revenues, and the control of the company.
- Strategic Alliance
This strategy ensures the entry of two or more entities into an agreement for collaboration or achieving certain goals as independent organisations.
- Slump Sale
Under this strategy, an entity shifts or transfers one or more undertakings for lump sum consideration. Under it, an undertaking is sold out irrespective of the individual values of the assets or its liabilities.
CAAQ can help you to get the best suggestions or advisory for business reconstruction via certified consultants. Contact us for a seamless support and consultation.