Business restructuring is a core part of the service offered by insolvency practitioners such as ourselves.
This article aims to define what corporate restructuring is, the legal mechanisms in which it operates, and how it can help your company.
What is Business Restructuring?
Very simply restructuring is the process used to alter the size, organisational structure or focus of a company for strategic purposes.
Restructuring may include selling assets, reducing staff, modifying debt, or issuing equity.
Why Do Companies Restructure?
The most common reason for business restructuring is debt. When a company becomes insolvent, it’s responsibilities become to creditors rather than shareholders.
When an insolvency practitioner is appointed he/she will have the task of ascertaining where the best return lies. If it’s in liquidating the company and selling the assets then that course of action will be chosen.
But in the case of a company with a business model that still works, or perhaps with a significant reputation (i.e. a football team) then the best return will come via attempting the company back on its feet.
Restructuring may also be done for a company that is preparing to change hands, undergo a merger, or where it needs to change tack in a significant way.
What are the Types of Restructuring?
The decision to restructure may come about due to:
- Corporate Merger
- Change in Legal Structure of the Company
- Debt Restructurng
- Turnaround (i.e. part of an administration)
- Strategic Repositioning (change of operational model)
- Selling or closing a business
- Spin Off – selling off a high perfoming part of the business
- Cost Reduction
- Equity Carve Out
What are Restructuring Strategies?
From the insolvency perspective, going into administration is the most common restructuring strategy.
Administration means that a legal ringfence is placed around the company, preventing further creditor pressure. This moratorium gives the administrator (a licensed insolvency pracititioner) time to assess the situation and establish the best course of action.
This may mean organisation or financial restructuring, intended to make the business leaner and more efficient. Ultimately, creditors need to be paid in the most efficient manner possible and, once that process is concluded, the company will either return to profitability, be sold, or potentially liquidate.
Another common tactic used by IP’s is the company voluntary arrangement, which is a structured payment plan with creditors for a proportion of the total debts. This must be voted upon and agreed by a majority of creditors based on what the company can afford. Insolvency Practitioners are adept are striking the balance between establishing a proposal which allows the company to survive, while also repaying creditors as much as possible.