Corporate restructuring is a common occurrence in the lives of many businesses. Companies may seek corporate restructuring techniques in reaction to declining earnings, broad market or economic pressures and trends, changes in ownership, changes in company strategy, or to boost cash flow, among other reasons. The goal of restructuring is to maximize a company’s strengths by lowering costs, removing inefficiencies, and improving profits.
Whatever the cause for restructuring, it is a difficult and time-consuming process that is best served by a good valuation of the commercial entity and/or its component parts. Extensive asset assessment may give a road map for the financial aspects of business restructuring, allowing the advantages of restructuring to be maximized. To correctly construct the impact of corporate restructuring plans, it starts with a thorough grasp of the company’s assets. We will look at the numerous forms of corporate restructuring, the motivations for restructuring, and the characteristics of various methods in this post.
Types Of Corporate Restructuring
There are generally two different forms of corporate restructuring; the reason for restructuring will determine both the type of restructuring and the corporate restructuring strategy:
- Financial restructuring may occur to changes in the market or legal environment and are needed in order for the business to survive. . For example, a corporate entity may choose to restructure their debt to take advantage of lower interest rates or to free up cash to invest in current opportunities. .
- Organizational restructuring is often implemented for financial reasons as well but focuses on altering the structure of the company rather than its financial arrangements. Legal entity restructuring is one of the most common types of organizational restructuring. Two common examples of restructuring are in the sales tax and property tax arenas. The first involves creation of a leasing company for operating assets that can allow for sales and income tax savings. In the second example, for property taxation, restructuring can change the method of taxation or create a revaluation opportunity to improve reporting positions. This can also lead to transfer pricing opportunities.
Reasons for Corporate Restructuring
As noted in the introduction, corporate restructuring may be implemented for a variety of reasons, but generally all of them are based in the desire to maximize the use of current assets and open up additional strategies. Companies may choose to restructure their finances and/or their organization for the following reasons:
- Improvement of profits: If a company isn’t properly deploying its assets to maximize profit, restructuring may be pursued to get the company on a more solid financial footing. The direction the company takes in its restructuring will be determined by the corporate strategy that best employs the resources available.
- Change in business strategy: A company may choose to eliminate subsidiaries or divisions that do not align with its core strategy and long-term vision and raise capital to support advancing the core strategy. Additionally, corporate strategy can be to maximize tax opportunities or improve flexibility.
- Reverse synergy: Just as companies sometimes seek mergers and acquisitions to create business synergies, the reverse is also true. Sometimes, the value of a merged or conglomerate unit is less than the value of its individual parts. Some divisions or subsidiaries may have more value in a sale than they do as a part of the larger corporate entity.
- Cash flow requirements: Divestment of underperforming or unprofitable divisions or subsidiaries can provide liquidity that the corporate entity cannot access otherwise. The sale of some assets can provide both an influx of cash and reduction of debt, giving the corporate entity easier access to financing and/or more favorable terms.
Common Features Of Corporate Restructuring
Regardless of the reason for restructuring, most restructuring strategies share some of the following features:
- Improvement in the company’s balance sheet
- Reduction of tax liability
- Divestment of underproductive assets
- Outsourcing of some functions
- Relocation of operations
- Reorganization of marketing, sales, and distribution
- Renegotiation of labor contracts
- Debt refinancing
- Public relations repositioning or rebranding
Most of these features relate to the financial aspects of corporate restructuring.
Corporate Restructuring Strategies
The ideal corporate restructuring approach for every specific firm is determined by the cause for the restructuring as well as the organization’s unique circumstances and qualities. Here are five instances of business restructuring techniques that are particularly relevant to valuation:
- Mergers and acquisitions (M&A): In a merger, a company is acquired and absorbed into another business entity, or combines with another existing company to form a new corporate entity. While this strategy is a common one used by companies in financial distress, it should be noted that M&A transactions are often the result not of financial distress but of the potential for business synergies that can be achieved by combining the two businesses.
- Reverse merger: The reverse merger offers private companies the opportunity to become public companies listed on the stock exchange—without the need to issue an IPO (Initial Public Offer). In a reverse merger, a private company purchases a controlling share of a public company and assumes control of the public company’s board of directors.
- Divestiture: Also referred to as divestment, divestiture is the sale or liquidation of subsidiaries or other assets. Companies can sell assets such as subsidiaries or intellectual property (IP); exit a business through a trade sale, typically conducted by auction; form a spin-off, creating a new business out of an existing part of the company; or issue an IPO, selling a portion of the business to public shareholders.
- Joint venture: In a joint venture, two or more companies form a new business entity. The individual companies involved agree to contribute specified resources and share the expenses, profits, and control of the new company created through the joint venture.
- Strategic alliance: The strategic alliance allows two or more companies to collaborate to achieve business synergies, while remaining independent organizations.
Valuation Services For Corporate Restructuring
If the corporate restructuring strategy includes a transaction—as in the M&A, reverse merger, and divestiture strategies—valuation services will be required to establish the value of the business or business assets affected by the restructuring. This will require the application of one or more of the three classic valuation approaches: the market, income, and cash methods of establishing value.
In an M&A transaction, the market approach might be sufficient, if the acquiring company expects to gain profitable business synergies; in such a case, the purchaser may find the estimate of value provided through a market valuation to be close enough. The same might be true of a reverse merger, where the private company acquiring the public company will gain access to listing on the stock market. In most other cases, however, a more definitive analysis of value will be required.
Even non-transactional business restructuring methods benefit from valuation services since it’s impossible to know what the optimal approach is in any particular circumstance if the worth of assets is unclear. A thorough assessment of the firm and its assets will assist executives in making the best decisions possible. A divestiture of a certain segment might provide the corporation with a higher financial benefit than, say, a joint venture. Only by determining the worth of the company and all of its components can the optimal corporate restructuring strategy for the situation be determined.
Need to know the value of your assets to inform the best corporate restructuring strategy for your company?
Before embarking on a corporate restructure, it’s crucial to have a sound understanding of the value of your business assets. Incorrect assumptions about value can cost your business if they lead to the adoption of a misguided restructuring strategy.
The world’s leading corporations trust Taqeem specialists to provide expert value opinions for all business assets—and we can do the same for your organization. Let’s talk about your unique situation to determine the optimal restructuring strategy for your company.