by Corporate restructuring is an action taken by the corporate entity to modify its capital structure or its operations significantly. Generally, corporate restructuring happens when a corporate entity is experiencing significant problems and is in financial jeopardy.
Corporate restructuring is implemented in the following situations:
Change in the Strategy: The management of the distressed entity attempts to improve its performance by eliminating certain divisions and subsidiaries which do not align with the core strategy of the company. The division or subsidiaries may not appear to fit strategically with the company’s long-term vision. Thus, the corporate entity decides to focus on its core strategy and dispose of such assets to the potential buyers.
Lack of Profits: The undertaking may not be enough profit-making to cover the cost of capital of the company and may cause economic losses. The poor performance of the undertaking may be the result of a wrong decision taken by the management to start the division or the decline in the profitability of the undertaking due to the change in customer needs or increasing costs.
Reverse Synergy: This concept is in contrast to the principles of synergy, where the value of a merged unit is more than the value of individual units collectively. According to reverse synergy, the value of an individual unit may be more than the merged unit. This is one of the common reasons for divesting the assets of the company. The concerned entity may decide that by divesting a division to a third party can fetch more value rather than owning it.
Cash Flow Requirement: Disposing of an unproductive undertaking can provide a considerable cash inflow to the company. If the concerned corporate entity is facing some complexity in obtaining finance, disposing of an asset is an approach in order to raise money and to reduce debt.
Steps:
- Start with your business strategy
The first component of company reorganization strategy is finding out why upper management wants to reorganize in the first place. Without understanding the new direction, the company’s heading or defining the problem the company is hoping to solve, there is nothing to guide the reorganization process and no way to measure its success.
The business strategy will arm you with the goals or criteria you’ll need to meet with this company reorganization plan if such a plan is even practical.
- Identify strengths and weaknesses in the current organizational structure
With the strategy in mind, you need to consider where your current organizational structure is failing to meet company goals and where it’s working. If you haven’t already, create an org chart to get an elevated perspective on where your company structure stands now.
Part of this org structure evaluation process should be to gather feedback. Too many companies undergo reorganization planning without taking into consideration the people who will be affected by both departmental and company restructuring plans. Your employees often have valuable insights on what isn’t working and what you should continue doing it’s up to you to gather those insights and include them throughout your company reorganization process.
It’s easier said than done, though. Without feeling that their concerns and ideas are taken seriously and are truly anonymous, your employees will be reluctant to divulge any feedback regarding a company restructure. It’s up to you to foster a safe environment in which employees feel their thoughts are valued. Consider sending out an anonymous survey to ask what they would change and how they would approach a company reorganization.
- Consider your options and design a new structure
After determining the problem with the current company organizational structure, gathering feedback from employees and key stakeholders, and considering all the existing job functions, it’s time to create a new organization model.
Bear in mind that this newly restructured model is only a first draft: It will and should change before being implemented. This new organizational structure should include:
- The vertical and horizontal lines of authority.
- An indication of who will be making formal decisions within departments.
- Attributes of employees, including skills and experience.
- The definition and distribution of functions throughout the organization and the relationships among those functions.
- Communicate the reorganization
Once you’ve weighed various options in your reorganization planning and determined your best path forward, it’s time to show the rest of the company with a reorganization announcement.
Don’t spring the change on your employees. Make communication and transparency the highest priority throughout your company reorganization process again, an org chart can help create clarity in this situation, especially paired with details about each role’s responsibilities. You might need to communicate separately with managers or anyone with a direct report to ensure that they’ll be able to answer questions and help with execution.
- Launch your company restructure and adjust as necessary
The moment has finally arrived to execute the company or department restructuring. Remember that change can be difficult give employees some time to adjust to the restructuring to accurately gauge its effects. Think back to your business strategy, and make adjustments if the new organizational structure still doesn’t meet your ultimate goals.
Implementing a New Business Plan
When a corporate restructuring plan is developed and approved, the resulting plan effectively supersedes the company’s original business plan. This is likely to be more detailed and time-sensitive than a traditional plan. One key to success is how effective business owners and managers are in adapting to changes during the implementation phase. As a business owner contemplating even the most basic restructuring plan, you should be prepared for the challenges ahead.
