Restructuring is a fancy word for changing how a company operates or markets itself during economic downturns, pandemics, or when the company is not as successful as it should be. A company needs to understand the process of corporate restructuring before starting.
Definition of Corporate Restructuring
Corporate restructuring is a term that means to modify the structure or the operations of the company significantly. When a company is facing financial jeopardy, it reduces its size, eliminates any financial troubles, and improves its performance.
A company may hire legal and financial experts to assist and advise as they look into debt financing, operations reductions, and the sale of the company’s shares to investors.
Reasons for Corporate Restructuring
A company may attempt to improve its performance with new marketing strategies and eliminate certain divisions that do not align with its focus.
Lack of Profits
There may be economic losses due to poor performance resulting from management’s wrong decisions, increasing costs, and changing customer needs.
A combined unit is worth more than the individual parts together. According to reverse synergy, the individual parts may be worth more than the combined unit. A company may decide that they may gain more value by divesting it off to a third party rather than owning it.
Cash Flow Requirement
A sale of an asset or division can help create a considerable cash inflow for the company. If the company is facing difficulty obtaining finance, selling an asset is a quick way to raise money and reduce debt.
Methods to Divest Assets and Reduce Size
Under divestitures, a company sells, liquidates, or spins off a subsidiary with an outside buyer. The selling company gets compensated in cash, and control of the company is transferred to the new buyer.
When a new company is created by diluting the equity and sells it to outside shareholders.
The new subsidiary’s shares are issued in a general public offering, and the new subsidiary becomes a different legal entity with its operations and management separated from the original company.
The company creates an independent company distinct from the original company as done in equity carve-outs, but with no public offering. The shares are equally distributed among the company’s existing shareholders. Since the new subsidiary stocks are distributed to its own shareholders, the company is not compensated by cash in this transaction.
Shareholders let their ownership of the business receive new stocks as they trade their existing stock in the company.
Liquidation is when a company is broken apart, and the assets are sold piece by piece. Liquidations are typically linked to bankruptcies.
The corporate restructuring allows the company to continue to operate. The company’s management tries all the possible measures to keep the business going with the hope a buyer may want to acquire the company and take it back to profitability.
Paul J. Burkhart
If you have any questions about restructuring your business, the Law Offices of Paul J. Burkhart, P.L. have experienced attorneys who can help you with the hardships businesses face.
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