Business restructuring is a specialty of ours, so it’s no surprise that it’s one of the most common subjects we’re faced with when people are looking for help with their business. The issue is that business restructuring can be handled by a number of different people in an unlimited number of ways. Speaking to an accountant about a restructure will be like speaking a different language to a business consultant, even though they’re both talking through the same options. So if you’re confused, you’re in the right place. Here are the most common methods of restructuring a business and the terms that go with them.
What is a business restructure?
Basically, a business restructure or informal restructure is an internally managed process of changing how the business works. This is very often done by successful companies to adapt to changing market conditions, but can also be done by failing or struggling businesses to get back on track. In this article, I will cover some of the more technical terms and methods of handling it.
This is one of the most commonly utilised methods of restructuring a business and what one usually thinks of when the term ‘restructure’ comes to mind. This is a process of identifying underperforming aspects of business operation and then systematically improving those aspects. However, operational restructuring should only be used to refer to those changes made to the profitability of a business, not those changes made to the capital structure. For example:
- Streamlining facilities and processes to improve systematic efficiency
- Elimination of non-core business
- Improving market-product alignment
This is a term that is often incorrectly used to refer to any restructure process. The error occurs because all aspects of a business eventually have some relationship to financial outcomes. Financial restructuring should be used to refer to any process changes that specifically address issues that are due to the capital structure of the business. For example inefficiencies:
- Involved in selling parts of the business
- In the conversion of preference shares to ordinary shares
- In the transfer of debts to different creditors
- Related to debt subordination or compromise
This is a process of managing areas of financial distress in a failing or struggling company in order to return to a healthy financial state. If a company is in distress, is facing or currently insolvent or merely underperforming, then turnaround management is the kind of restructure that is implemented. There are many sub-domains of turnaround management that can be pursued, for example:
1. Business stabilisation. This is a process that is utilised to manage short-term causes of financial distress, especially when unexpected. For example, if a business has incurred a major fine or lost a major contract. Business stabilisation refers to a number of short-term options that will improve cash-flow in the short term to facilitate long-term planning.
2. The workout. A workout is a method of dealing with creditors by restructuring your business. It is commonly used in very dire situations as an alternative to administration or liquidation. It’s so under-used and extremely useful.
3. Debt refinancing. This is a process of identifying more expedient methods of addressing the companies debt finance. For example, seeking a more appropriate type of finance or rescheduling the terms of a finance plan.
In all of these cases, restructure is an invaluable tool for the business owner in managing their affairs.