Restructuring is an action undertaken by companies to make significant changes in their financial and operational framework, especially during financial stress. It often involves modifying the structure, debt, or operations to minimize losses and boost business performance.
When facing challenges in meeting debt obligations, a company might opt for debt restructuring—consolidating and adjusting the terms of its outstanding debt. On the operational end, a business may cut costs by downsizing its payroll or selling off assets.
Key Takeaways
- Restructuring involves major changes to a company’s financial or operational structure, typically carried out under financial strain.
- Companies may also restructure for preparation towards a sale, buyout, merger, change in overall goals, or transfer of ownership.
- Successful restructuring often results in a more streamlined and economically sound organization.
Discovering the Power of Restructuring
Companies may decide to restructure for reasons such as weak financial fundamentals, poor earnings, underwhelming revenue, overwhelming debts, or excessive competition. Often, restructuring is a strategy to prepare for a sale, buyout, merger, change in business objectives, or ownership transfer. For instance, a failed product launch might push a company to restructure to continue covering payroll and debt payments.
Depending on shareholder and creditor agreements, restructuring strategies may include asset sales, revising financial agreements, issuing equity to reduce debt, or filing for bankruptcy to maintain business operations.
Streamlined Processes: The Restructuring Journey
Internal restructuring can involve changes to operations, processes, departments, or ownership, often resulting in a more integrated and profitable business. Companies hire financial and legal advisors to create and negotiate restructuring plans. They may sell parts of the company to investors or bring in a new Chief Executive Officer (CEO) to lead the transformation.
Changes might encompass procedures, computer systems, networks, locations, and legal matters. Job positions might overlap, leading to layoffs. Though turbulent, once complete, restructuring aims to deliver smoother, more efficient business operations. However, not all restructuring efforts succeed. In some cases, a company might wind up selling or liquidating assets to pay off its creditors—a step often leading to permanent closure.
Special Considerations in Restructuring
Restructuring costs can stack up quickly, covering aspects such as the removal of product lines, contract cancellations, division eliminations, asset write-offs, facility closures, and employee relocation. Expanding to new markets, introducing new products, onboarding new employees, or purchasing property also brings additional costs.
The business model often results in new types and volumes of debt, irrespective of whether the company grows or consolidates its operations.
A Real-World Example: Success through Strategic Restructuring
In late March 2019, Savers Inc., a leading for-profit thrift store chain in the United States, implemented a successful restructuring plan. This agreement reduced its debt by 40% and saw the involvement of Ares Management Corp. and Crescent Capital Group LP.
An out-of-court restructuring, approved by the company’s board of directors, refinanced a $700 million first-lien loan, reducing the retailer’s interest costs. It paid existing term-loan holders in full while allowing senior noteholders to exchange their debt for equity.
Different Paths to Successful Restructuring
Businesses can restructure in various forms, including legal restructuring, turnaround restructuring, cost restructuring, divestment, spin-offs, repositioning, and mergers and acquisitions. Each type addresses specific challenges and goals, fitting different business circumstances.
Restructuring and Layoffs: What’s the Connection?
Typically, restructuring is accompanied by layoffs. Downsizing is a common aspect of restructuring, often targeting the closure of some groups, merging others, and enhancing overall efficiency to cut costs.
How Many Times Can a Company Restructure?
There’s no legal limit to how often a company can restructure. Businesses may engage in multiple restructuring efforts to repeatedly optimize efficiency. However, since restructuring is complex, time-consuming, and strategic, it shouldn’t be undertaken lightly or frequently.
Related Terms: corporate finance, mergers and acquisitions, equity, bankruptcy, debt consolidation.
References
- S&P Global Market Intelligence. “Savers Agrees to Restructuring Deal With Ares, Crescent Capital”.
