Business Restructuring Process 101
What is business restructuring?
Business restructuring is a strategic process of modifying a company's financial, operational, or organizational structure to improve its efficiency, profitability, and overall performance.
Restructuring is often undertaken in response to financial difficulties, changes in the market, or strategic shifts in the company's direction.
Process of corporate restructuring
The restructuring process can be a proactive or reactive one. Companies that fall into the latter category opt for reorganization in response to reaching financial crisis point. Reorganization offers an alternative to liquidation and a means of paying off debts while staying in business.
On the other hand, forward-thinking companies choose proactive organizational restructure as a way to optimize the business, eliminate under-productive divisions, encourage growth, and increase profitability. Some of the strategies used include:
- Divestment (spin-offs, split-ups, carve-outs etc.)
- Mergers & acquisitions
- Legal entity and/or name change
Debt restructuring process
The debt restructuring process is most commonly a response to financial distress. In other words, it is usually initiated by a company that cannot pay its bills and is losing favor with creditors.
This process can take place with or without the help of the courts, depending on the seriousness of the situation and whether the process is initiated by creditors.
Learn more: Corporate Debt Restructuring
Regardless of the country in which your business is located, the following steps will usually apply:
Step 1: renegotiate with creditors directly
If you act early enough, there’s a good chance you will be able to renegotiate payment terms and even interest rates if you get in touch with lenders directly and explain the situation.
Step 2: initiate formal proceedings
If step one is not possible or not sufficient to resolve your company’s financial distress, a business will have to initiate formal insolvency proceedings.
In the US, this involves filing a chapter 11 reorganization petition and putting together a proposal for approval by creditors that outlines how you plan to pay off debts while remaining operational.
In the UK, companies have the option of entering into a Company Voluntary Arrangement (CVA) with creditors via an insolvency practitioner, or putting the company into administration.
Is your business in Australia? Make sure you read: Safe Harbour Insolvent Trading
Organizational restructuring process
Organizational restructure, as opposed to debt restructure, usually involves assessing internal capabilities, processes, and structure. This is often broken down into four key areas:
- People: workforce, leadership, skillsets
- Technology: tools, software, hardware, automation
- Processes: inefficiencies, bloat, documentation
- Structure: governance, legal, function
The process therefore would be to:
- review and analyze the four key areas;
- identify gaps and room for improvement;
- develop plan of action;
- test scenarios;
- execute.
3 types of restructuring strategies
Downsizing
For organizations experiencing a degree of financial distress, downsizing is a useful cost-cutting strategy. In essence, the company’s core business offering remains the same but the number of employees reduces. This restructuring activity is very common during an economic downturn or recession.
Example: Snapchat
In 2018, Snapchat laid off approximately 100 engineers, equating to 10% of the total engineering team and about 3% of the entire workforce.
Learn more: Critical Components of Organizational Restructuring and Downsizing
Downscoping
This is another term for divestment or divestiture. Downscoping involves identifying and eliminating under-performing business units. It’s critical for companies to get downscoping right, as most businesses are more familiar with acquisitions rather than divestitures. Just as post-acquisition integration should be a focus for acquiring companies, so must a comprehensive separation program be for successful divesting companies.
Example: Sanofi
In 2020, Sanofi sold $5 billion of its minority equity stake in Regeneron, with the aim of raising funds to reposition itself within specialty pharma. Three months later, Sanofi announced the $3.7 billion acquisition of a US-based biotech company.
Leveraged buyouts
A leveraged buyout (LBO) is when a buyer (usually a private equity firm) purchases a public company’s assets, which turns it into a private company.
Example: Hilton Hotels
In 2007, Blackstone Group purchased Hilton Hotels for $26 billion in an LBO. After the global financial crisis hit in 2009, Hilton refinanced, operations improved, and Blackstone sold Hilton at a profit.