A properly planned restructure can save a company. Karen Holden, founder of A City Law Firm, looks at the different options available to business owners and advises on the most suitable route to take.
What does it mean to restructure your business?
Typically, when referring to restructuring a business people mean carving up the different parts of the business. It can take many guises including selling off assets, creating subsidiaries, transferring ownership rights as well as reorganising staffing, debts and sometimes the underlying business model itself.
Most of the time this is done when a company is in (or about to become in) financial dire straits. If this is the case directors have to tread carefully to ensure that the restructuring is in the interests of the shareholders or creditors (depending on whether the company is solvent or not) and ensure everything is carefully considered to ensure the directors do not fall foul of a raft of insolvency legislation.
Unfortunately, businesses often leave the restructuring too late but proper restructuring or, ideally, properly planned structuring from the outset can save (and even safeguard) your business.
Consolidation and hiving off, up or across
When restructuring a business, you might consider either consolidating the business or hiving off part of the business depending on how this has been set up.
In certain circumstances, you might need to consolidate different aspects of the business, especially if the corporate structure has become unnecessarily complex or to enable the business to access specific lenders or funding.
Hiving off parts of the business (or sometimes called a demerger) is typically done by way of creating subsidiaries and moving parts of the operations into different corporate entities. You also have hive up’s where assets are moved up to a top co or across taken to mean moved to a third party.
During this process parts of the business (or subsidiaries) may also be sold. This enables a business to sell off the loss-making or underperforming parts of the operation to someone who may be better equipped in the market or to sell part of the business which is under-utilised or simply not supported by the business.
Often when a company is in financial distress it will look to explore a period of corporate turnaround with its creditors.
This is a detailed analysis of the financial position of the company during which the company will look to try, with the support of the creditors, to reorganise the debts of the company. For this to work there has to be a viable business (be that a part of the business/ products / intellectual property) worth saving.
It is essential that there is a coherent agreement between the company and its creditors to allow the company a period of time to turn around the business without the risk of the creditors enforcing their debts and forcing insolvency proceedings. Creditors may prefer the turnaround to be placed on a statutory footing with the company either going into administration or entering into a company voluntary arrangement (CVA).
Most of the time a director owes a duty to act in the best interests of its shareholder, these are usually aligned to those of its creditors, however during periods of financial difficulties this may not be the case and its important they directors act in a transparent manner with the best interests of their creditors in mind.
A director has to also be mindful that as part of any corporate restructure he is not transferring the asset at an undervalue nor setting up a position where there is a preference afforded to a creditor as a result of the company going insolvent.
In both circumstances, there is a risk that upon insolvency the asset will be clawed back by the insolvency practitioner. We would always encourage a business owner to work with a licensed and experienced insolvency practitioner to ensure you were fully aware of all the risks associated with any corporate restructure necessitated due to financial difficulties.
Restructuring a prosperous business
All businesses should be alert to the need to adapt and evolve to an ever-changing market place.
The best time to restructure a business is during a time of prosperity. It gives you time to properly reflect on which parts of your business are driving your profits, which expose your business to the most risks (financial, legally and commercially) and which parts are potentially weighing you down.
From a legal perspective, it is a beneficial exercise to examine whether your operations should be separated out into various subsidiaries, with an overall group structure for your business. Whilst there are administrative costs associated with this, the benefits afforded by limited liability will often outweigh this.
Practical ways to restructure
Depending on the size of the business and it’s financial circumstances there are a number of ways a company may consider restructuring.
Regardless of the route taken and the reasons behind it, it is usually a very constructive exercise for business owners to closely examine its finances, legal structure and commerciality.
Ways of possible practical restructuring might include:
- Considering staffing levels and making redundancies
- Moving and/or selling assets
- Considering ways to maximise your revenue streams
- Realigning the operational risks and costs including considering franchising, licensing, appointing a distributor or agent
Most businesses only approach a restructure during times of financial difficulties, but business owners can restructure the business at any time. Regardless of the circumstances, it is usually a beneficial exercise, allowing a period of reflection on the business.
If it is during a period of financial difficulties it is important to proceed with caution and take the advice of qualified professionals who can help navigate through the many potential pitfalls.
A City Law Firm can assist in planning much of the above and work closely with you to address many of these issues.