Categories
Business Restructuring
Businesses can reach a stage where their current structure is no longer performing and substantial change is needed to continue operating.
When looking to create a more effective and profitable business, many CEOs and top management plan a comprehensive program of business restructuring. This involves a thorough overview and analysis of the business in its current form to determine what aspects of the company can be improved and streamlined, and what strategy to use to move forward.
Learn everything you need to know about the process - including how best to finance it - in our comprehensive guide.
Why Use Business Restructuring
Companies may consider business restructuring for several legitimate reasons, which include:
- Financial burden - Companies struggling with considerable financial distress can utilise a business restructuring strategy to refinance their debt and renegotiate payment terms with creditors.
- Mergers and acquisitions (M&A) - When taking part in a merger or acquisition, either as an equal partner, dominant company, or acquisition target, a comprehensive business restructuring is inevitable.
- Response to current economic climate - Forward-thinking CEOs may look to business restructuring as a proactive strategy when changes occur in the marketplace. This may be due to the emergence of new technologies, a rise in competition, or devaluing of a business core product or service. In these cases, proactive business restructuring often gives a company the revitalisation it needs to avoid future difficulties.
- Technology advances - Major infrastructure or other technological improvements in the sector can make a restructuring extremely beneficial as old practices are rendered obsolete and new streamlined processes present new business opportunities.
- Regulatory changes - Sometimes, changes in the legal framework governing the business sector can result in an essential business restructuring to avoid future problems.
6 Types of Business Restructuring
There are many types of corporate restructuring, some of which involve purely internal changes, while others involve a joining with another organisation to create a greater whole.
Merger
A merger is the voluntary equal joining of two companies. Part of mergers and acquisitions (M&A), mergers can be extremely beneficial for both companies:
- Increased Market Share - Joining two companies in a single sector creates a stronger force that combines the customer base of both original companies to create a far more dominant position in the market.
- Improved Purchasing Power - Mergers result in companies with greater purchasing power, allowing them to generate direct cost savings through economies of scale and superior negotiating positions with suppliers. This leads to lower costs and increased profitability.
- Diversification - Companies that merge from different marketplaces, geographies, or products and services offered benefit from reduced risk thanks to a larger portfolio and less dependence on a single market.
- Innovation and Talent - A significant gain is made when personnel from different companies are able to pool their talent to improve the new business’s future output. Innovation grows not only through this increased base of skills, but also with combined technologies and intellectual properties.
- Stronger Financial Position - The new company will have the assets from both original enterprises, as well as the financial stability of a larger business with wider resources and improved outlook. This presents a stronger financial position for future funding applications, boosting the potential for growth and investment.
Acquisition and Takeovers
An acquisition involves one company purchasing a second business and obtaining its products, services, and assets.
Acquisitions can be either friendly, where the management and board of directors of the target company approve and support the acquisition, or hostile, where a majority of shares in the target company are purchased against the wishes of its management.
Acquisitions differ from mergers in that the purchasing company absorbs the target business into itself, keeping the assets it values and divesting itself of those that are unwanted; however many of the benefits of a merger exist also in an acquisition, even if hostile.
Businesses may look to being acquired when:
- They are facing insolvency
- They have an asset or intellectual property that is unique and of value to the acquirer
- The owners are looking to retire
- The current shareholders are keen to accept a premium price for their shares
- Becoming acquired increases future opportunity and overall stability
- The management direction and talent in the acquiring company will improve prospects
Divestiture
A divestiture is when a business divests itself of assets that are no longer profitable or efficient. This may mean the sale of part of the business, such as a subsidiary, or merely the liquidation of physical assets that are not proving cost-effective.
Divestitures may be undertaken for several reasons, including:
- To raise capital to cover debt obligations - Companies struggling under large debt liabilities will often use this aspect of business restructuring to prevent a further slide into insolvency proceedings, selling on the assets when they have control over the outcome and can take advantage of time to secure a better return.
- To improve cash flow - If an asset is no longer proving itself to be profitable, then it can become a drain rather than a benefit to cash flow. Divesting itself of the underperforming asset can improve long-term cash flow prospects as well as providing an immediate boost to capital.
- Improving debt service coverage ratio for future funding - Releasing under utilised assets to generate both capital and lower ongoing costs will improve the business’s debt service coverage ratio, making it a better prospect for debt finance. This can set the company up for planned expansion or place it in a better position to take advantage of unplanned opportunities
New Joint Venture
Working with another company to undertake a new enterprise can bring significant benefits, with each participant injecting resources and capital into the new venture to maximise its chance of success.
A strategic process, joint ventures will generate a new business structure in of themselves, but may also initiate or require restructuring within the core businesses.
Joint ventures are also excellent opportunities to make the most of differing business strengths, bringing the talent and experience from two separate companies together to create a new whole.
Reevaluating the business with an eye to the financial health of the company, a financial restructuring reorganises the company’s capital structure. This involves refinancing debt and negotiating new terms with creditors.
With an overall goal to improve the financial stability and cash flow of the business, a well-considered financial restructuring can completely revitalise companies that were previously finding debt management an overwhelming burden.
Organisational Restructuring
An internal organisational restructuring is one where the configuration of personnel, management, and departments is analysed with a clear eye and changes are made to better streamline processes and improve productivity.
How Business Restructuring Works
Advice and planning are essential for a successful business restructuring - there is little point of restructuring badly, and this can occur if the right expertise is not solicited prior to the undertaking.
The first phase of a business restructuring is a comprehensive assessment and strategic planning period, which involves:
- A thorough analysis of business strengths and weaknesses
- A detailed overview of business finances
- Assessment of company assets, their efficiency and value
- Evaluating restructuring options
- Engaging with specialists to advise on legal, financial, technological and structural aspects to the restructuring
- Creating a plan for the business restructuring
The second phase is one of communication, discussing with shareholders and key personnel regarding the planned restructuring.
The third phase involves the actual implementation of changes. This process is often substantial and will involve a great deal of management time, potentially over many months.
Finally, the restructuring should be properly assessed and monitored, allowing the management room to make adjustments as needed both during the official process and afterwards, to maximise profitability and efficiency.
The Legal and Regulatory Framework for Business Restructuring
There are several key laws that govern business restructuring in the UK, especially those that are triggered through administration or insolvency proceedings including:
- The Insolvency Act (1986)
- The Enterprise Act (2002)
- The Companies Act (2006)
- The Corporate Insolvency and Governance Act (2020)
- The Employment Rights Act (1996)
- The Competition Act (1998)
Business Restructuring Financial Considerations
While a business restructuring is often implemented due to financial difficulties within a business, it is not without its own financial implications.
It is essential that these costs are properly considered and a cost-benefit analysis undertaken prior to engaging in the restructuring plan.
The costs that are associated with the restructuring process are both direct and indirect may include:
Management
- Consultancy fees - First stage consultancy fees, such as expert advisors and accountancy fees.
- Legal costs - Regulatory and legal fees.
- Business valuations - Where a merger or acquisition is taking place, third-party valuation and due diligence are essential.
- Human resources expenditure - Where employee contracts are terminated, there will be a cost for redundancies and other terminations. Additionally, employees may be offered new financial packages that will incur a cost to the company both in the short-term and ongoing.
- Asset valuation and sales - Independent market valuation of assets will be required for sale or use as debt collateral. Costs may also be incurred when divesting assets.
Business Disruption
- Operational disruption - While the business restructuring is taking place, it may be impossible to continue work as usual, bringing a cost to the business both in immediate work not done as well as the impact of the loss of clients and customers.
- Employee morale and productivity - A business restructuring will likely have significant impact on company morale, with a knock-on effect regarding productivity.
- Management time - Restructuring is extremely time intensive, especially at a top management level and can consume management resources for an extended period.
- Training Costs - The costs of training comprises both a direct component and an indirect loss of productivity while employees settle into the new structure.
Debt Management
- Renegotiation consultancy - Fees may be incurred utilising professional brokers and consultants to get the best renegotiation deals.
- Refinancing fees - Early repayment fees and arrangement fees will add a cost to debt refinancing.
Additional Financial Considerations
- Tax liabilities - Asset sales and debt restructuring may have an impact on tax obligations.
- Equity and share value - The value of existing shares will alter and may shake confidence in the business, especially in the short-term.
Funding Support for Business Restructuring
There is a great spread of business finance developed to aid in business restructuring, available at every stage of the process.
Here are some options to consider at each stage.
As business finance specialists, we can help advise on any and all of the below products within the wider context of a business restructuring.
Covering the Initial Direct Costs of Business Restructuring
The business needs when financing a corporate restructure process will depend a lot on the type of restructure.
M&A finance, for example, requires substantial capital investment that is typically acquired through a combination of equity finance and debt finance, tailored to suit the specifics of the merger or acquisition.
By contrast, funding a restructuring with the looming threat of insolvency requires a package of higher-risk asset-based lending with specialist lenders.
Clifton Private Finance has dedicated teams specialised in these very different business requirements and can work with you to produce a tailored package of financial products that will perfectly suit your business needs. Speak to us today to see how our team can help you.
Suitable Products:
Cash Flow Finance During Restructuring
While restructuring is underway, the disruption to the existing business workflow may be considerable. Ensuring that cash flow is not negatively impacted and that essential obligations are still paid on time often requires the support of dedicated cash flow finance.
This may include obtaining specialised revolving lines of credit, or seeking short-term revenue-based finance, such as a merchant cash advance, to leverage future income to pay immediate expenses.
Let us help you put in place the flexible cash flow finance you need during your business restructuring.
Suitable Products:
Debt Restructuring and Refinancing
One of the main components to business restructuring is that of debt management.
As experts in the arena of refinancing, Clifton Private Finance are perfectly placed to help you obtain the best rates and lowest fees when seeking business debt consolidation and restructuring.
With established relationships with the very specialised lenders who are comfortable working with clients that have a history of bad credit, we are able to help businesses with complex debt problems, obtaining the credit facilities most needed to ensure long-term financial success.
One of the key concerns when obtaining debt refinancing is that the structure is in place to ensure there isn’t a spiral of problems that manifest themselves once again a few years later, forcing another costly restructuring.
Clifton Private Finance have the experience needed to work with you for the long-term, helping you with the right debt finance solution at every stage of your business journey and ensuring your business has the funding it needs to be truly successful.
Suitable Products:
Ongoing Long-Term Financial Support
A restructured business increases its chance of success with the backup of ongoing financial support.
With knowledge of the vast range of products in the financial marketplace that are designed to encourage expansion and ensure a long life of financial health, Clifton Private Finance are well-positioned to be the perfect funding partner.
Suitable Products:
- Revolving credit facilities
- Asset-based secured loans
- Commercial mortgages
- Asset finance
- Invoice finance
- Purchase order finance
- Merchant cash advance
- and more…
To see what we can do for you, call us on 0203 900 4322 or book a free consultation below.
