Business Restructuring practices for enterprise transformation

Wuthivet Vetchabutsakorn, Senior Vice President, Group Head of Finance, ONYX Hospitality Group

Business restructuring is the process of transforming a business into a better, more efficient version. In most cases, corporate restructuring takes place due to businesses’ need to change, as a result of financial difficulties. During the COVID pandemic, many companies struggled to maintain a consistent monthly profit, stable cash flow and began to slide into losses; will opt to look inwards and restructure in order to survive. 

Other companies have been looking for and finding a way to survive and regain a competitive advantage. Businesses may also consider restructuring after they notice their competitors consistently outperforming them in growth and market share.

How does business restructuring impact businesses? Restructuring can help business run more efficiently but a poorly executed restructuring can also do more harm than good. The process can offer many benefits if it’s done correctly including:

1. Increasing productivity

2. Refocusing on core brands & products and providing opportunities for future growth

3. Decreasing operational costs and reducing inefficiencies

4. Restructuring the balance sheet and improving liquidity

In common, there are three types of business restructuring:

“Restructuring can help business run more efficiently but a poorly executed restructuring can also do more harm than good.”

1.Financial restructuring

Financial restructuring involves substantially altering company's operational and financial strategy to prevent it from experiencing a pattern of losses and cope well with some extreme financial pressures. Financial restructuring process typically includes two major practices aside from reducing costs or asset sales to manage cash flow.

Debt Restructuring: The process of debt restructuring is necessary when a company is having issues with liquidity or limited debt service capacity to restructure its debt to lower borrowing costs and improve its working capital situation. A healthy company can choose to restructure its debt by replacing its present high-cost debt with lower-cost borrowings, taking advantage of market opportunities. A company having issues with liquidity or limited debt servicing capacity may choose to restructure its debt to lower borrowing costs, extend the periods of debt obligation payment and improve its working capital situation.

Equity Restructuring: Company may be required to recapitalize the new issued equity into the business when the liquidity problems arise and when company isn’t able to borrow from creditors due to the breaches in lender’s financial covenant such as debt to equity or debt coverage ratios. The other equity restructuring practice is to do the capital reduction using proper accounting method to clear-out the negative accumulative retained earnings; this practice will allow the company to pay out the dividends after the completion. 

2. Organizational restructuring

Organizational restructuring is a change in the management and organizational structure of a business. The purpose of organizational restructuring can be to streamline the operation & manning structures or in some circumstances to cut costs or set a business up for a possible sale or merger. 

Aspects of a business that can be restructured can stem down to altering the hierarchy at the top of a company, cutting down the manning required, and changing roles & responsibilities for particular team to better suit the future needs of the company.

3. Portfolio restructuring

This occurs when businesses want to change their business model and product offering, such as when a consumer product company decides on which brands should the company continue and focuses on or which existing portfolios or assets should the company drop. Which region/ country should the company focus on for growth and strategy presently?

Repositioning also refers to when a company wishes to expand its focus into other ventures like new business etc.

Business restructuring always carries a risk—changing the status quo, alienating certain employees or disturbing day-to-day operations from what it was before.

In summary, it’s profitable when companies thoroughly understand the implications of business restructuring by taking more calculated risks, thus improving their chances of a successful and profitable restructuring.

In fact, restructuring a business can be the most effective tool to ensure that a company is running in the most efficient manner and for promoting future success with long-term sustainability. 

Financial