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2 September 2019

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5 Different Forms of Corporate Restructuring to Consider

Posted by: Akbar Ali

Every business, whether large or small, will go through a period of turbulence. In a world where economic and political trends can be difficult to predict, the best way to minimise disruption to your company or group is to regularly review its corporate structure.

This not only allows you to promptly identify and deal with any weaknesses or inefficiencies, but it will also give you the chance to look for any new opportunities in your market.

For businesses that are struggling, corporate restructuring can help you make debts and liabilities more manageable and reduce the stress you carry on your shoulders.

When it comes to corporate restructuring, there are many different forms to choose from depending on your business’s goals. In this article, we’re going to look at the common reasons for corporate restructuring, along with the different forms available to you.

What is Corporate Restructuring?

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For anyone new to the world of corporate restructuring, it’s wise to have a firm grasp of what restructuring means before you look at the individual forms as this area of law is very complex.

Corporate restructuring is the process of changing the composition of a business or group with the goal to make it more profitable. While the assumption is often that corporate restructures are only used by struggling businesses, this is far from the case. Corporate restructuring is often an essential part of successful business acquisition and growth.

Corporate restructuring comes in two core forms:

  • Financial restructuring: Where businesses have debts and tax considerations, it’s often necessary to restructure financially to reduce liabilities and increase profitability.
  • Organisation restructuring: Over time, a business or group’s organisational structure can become inefficient either because of surplus services or complex employee hierarchies.

Reasons for Corporate Restructuring

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The first step to understanding which form of corporate restructuring is suitable for you is to determine the reason you need it in the first place. Typically, it’s down to one of these four reasons:

  1. Financial distress: Your company is losing money as a result of costs that are too high and growing debts. All this results in an inability or difficulty to pay creditors.
  2. Expansion:  You’re buying another company, incorporating a new business strategy or developing a different way of working. As such, you need to review your structure to ensure efficiency does not slip.
  3. Management: Expansion and growth have resulted in a complex management hierarchy that can benefit from being simplified, or perhaps entire portions or your business have become redundant.
  4. 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.

5 Different Forms of Corporate Restructuring

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1. Mergers & 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 you to rapidly increase your revenue, production capacity and market reach, all without the time and hard work of building a new company.

M&As 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.

2. 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. Where a business unit is no longer profitable or fulfilling a strategic purpose, you may consider selling or closing it — 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 simple solution. This involves restructuring the unit to become its own standalone company which you still partly own. This can be particularly useful if you want to achieve a high valuation on part of your business.

3. Debt Restructuring

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Debt restructuring is one of the most common motivators 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.

You may be able to restructure your debt and continue trading by introducing a Company Voluntary Arrangement (CVA), which is a legally binding agreement between you and your creditors. If you think you’ll make profit again in the future, a CVA can provide short-term relief from your debts in return for a guarantee that you’ll honour them in the future.

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

4. Cost Reduction

If you’re facing growing debt in your business, it’s likely that your running costs are too high. In these situations, reviewing your corporate structure can highlight overspend, whether in the administration or operation of your business.

In order to reduce costs, you may consider liquidating redundant companies in your business group to release assets, reducing the number of employees, or restructuring departments to remove unnecessary management costs.

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 the incorporation of new investors or a change in the ownership structure if a business unit leaves the group.

Conclusion

In this article, we’ve briefly explored five different forms of corporate restructuring, but there is far more to consider than can be discussed in a single blog.

For that reason, if your business or group is facing change in the future, whether good or bad, it’s essential that you speak to an experienced commercial solicitor about your options.

Get in touch with the commercial team at Glaisyers to learn more about how we can help you enhance your business’s corporate structure.

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Akbar Ali - Head of Corporate, Operations

To discuss how Glaisyers can assist you contact Akbar Ali on aia@glaisyers.com or via 0161 832 4666.

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