Corporate restructuring – When does it make sense?
To be successful in business over the long term, resilience and adaptability are critically important. Business managers/owners can face financial challenges for a variety of reasons ranging from changing customer needs or demographics, obsolete processes/technology, or new, aggressive competition or economic downturns.
Businesses that ignore the warning signs or do not implement corrective actions on a proactive basis are much more likely to experience a material decline in the value of the business, which can happen quickly and even be very difficult, costly, or even impossible to turnaround.
Business managers/owners must continually take stock of their situation, including honestly evaluating the following:
- Can the business remain viable in its current structure?
- Is there a sufficient level of trust and comfort with lenders, suppliers, and other stakeholders to provide needed time and support?
- Is the problem temporary or permanent, and is it fixable?
- Does the business have the resources to see it through, and if not, can they be obtained?
If the evaluation reveals serious issues, the business’s survival may be in jeopardy. The objectives of a restructuring include:
- Ensuring the ongoing survival of the business
- Preserving the value of the business in the long term
- Maximizing recovery to owners from a windup or sale of the business, when required
Depending on specific circumstances, the restructuring may be done informally by management, or it may require a more formal legal process. In either case, a successful restructuring needs to be properly planned to ensure the appropriate required internal and/or external resources are available, and steps can be efficiently implemented to support a successful outcome.
The corporate restructuring plan
Comprehensive plans need to be developed based on a sound strategy and tactical steps to be taken to achieve the desired objectives.
Strategic plans summarize what needs to be changed if the business is still viable or, if no longer viable, how a sale or windup can be effectively and efficiently carried out.
Detailed tactical plans summarize the specific steps and timelines of restructuring activities, which may include the following:
- Developing relevant stakeholder communication plans
- Changes to management, administrative, and accounting resources and processes
- Preparing relevant financial reporting
- Assessing profitability improvements including outsourcing operating/administrative activities
Increasing cash flow and working capital by way of:
- Maximizing accounts receivable collections by offering discounts, tightening customer credit terms
- Re-negotiating more favourable product pricing or extensions to supplier payment terms
- Liquidating slow moving or obsolete inventory
- Re-negotiating or terminating leases, supplier, or customer agreements
- Changing the product, customer, or sales mix e.g. online vs. bricks and mortar
- Assessing human/IT resources, including:
- Internal – management, administrative, and accounting staff
- External – operations, logistics, marketing, customer service
Raising capital through existing or new sources including:
- Existing lenders and owners
- Factoring of accounts receivable
- Additional senior or secondary debt or equity from strategic/financial investors/partners
- Sale of assets or the business
- Sale/leaseback of real estate
- Sale of redundant assets, brands, product lines, divisions
- Sale of the entire business – going concern vs. asset liquidation
Assessing issues and challenges
Management: Meeting the level of stamina and required leadership skills, as well as the capabilities of and buy-in of supporting staff to meet the demands needed to complete the restructuring.
Administrative and accounting: Having sufficient staff resources and systems able to produce business plans and integrated financial and cash flow forecasts, internal and external reports to measure results, analyze variances, and provide feedback on a timely and regular basis to business leaders, as well as to lenders and other third-party stakeholders, when required.
Lender and investors: The state of current relationships, which will be needed to obtain continued support, confidence, and comfort level.
Other critical stakeholders: The ability to obtain the support of suppliers, landlords, employees, customers, and other third-party stakeholders, if needed.
Additional operating resources: The availability and ability to obtain required expertise, and/or affordable additional capital from existing or new sources.
Informal restructuring
Business owners/managers know their businesses best and are in the best position to make necessary changes to preserve value and prevent further loss. A successful informal restructuring will require that business leaders sufficiently prepare for and lead the restructuring, sometimes with the assistance of experienced restructuring advisors. This will allow owners to stay in possession and control of the business.
An informal restructuring can be flexible and is usually less costly than formal proceedings, however, it requires that businesses have sufficient time and resources to be able to negotiate more favourable terms with their stakeholders.
Formal restructuring
If third parties have threatened or commenced legal proceedings, there may not be sufficient time to successfully restructure without the business obtaining court protection from creditors and third parties, which can usually stall third party actions and provide the time needed to carry out the restructuring.
Engaging a restructuring advisor
Carrying out a business restructuring takes specialized skills that business leaders may not possess but are critical to a successful restructuring. Experienced restructuring advisors can assist businesses and their management/owners and their current advisors to plan, develop, and carry out restructuring plans by providing:
- Strategic advice and option analyses
- Assistance with the preparation of reports including financial projections, cash flow forecasts and variances, and compliance with lending and business agreements
- Industry and restructuring experience to enhance the effectiveness of negotiations with lenders, trade suppliers, customers, employees, and other stakeholders of the business
- Advice and assistance with the development of restructuring plans tailored to the specific situation, which may include supervising/carrying out a capital raise and/or a downsizing, sale, or windup of the business
- Assistance with the implementation and monitoring of the restructuring plan, on behalf of owners/management and third-party stakeholders
Summary
The restructuring of a business is often needed to preserve value when operations and systems cannot be changed quickly enough to meet a changing or completely new environment.
Not making necessary changes on a proactive basis or dealing with warning signs that have arisen may lead to a complete loss of value of the business and it can happen quickly.
The nature of the restructuring will depend on the specific circumstances involved. Taking the time to properly plan a restructuring, including obtaining advice from experienced restructuring advisors before serious warning signs arise, is always recommended.
About the author
Ken Pearl, MBA, CPA, CA, CIRP, LIT, is a Partner of Fuller Landau LLP and a Senior Vice President in the Corporate Restructuring and Insolvency group. Ken can be reached at 416-645-6519 or kpearl@fullerllp.com.