Corporate restructuring plays a role in the life of many companies. In general, companies may pursue corporate restructuring strategies in response to falling profits, general market or economic forces and trends, changes in ownership, changes in corporate strategy, or to increase cash flow. Restructuring is usually done with an eye toward maximizing companies’ strengths by reducing costs, eliminating inefficiency, and increasing profits.
Whatever the reason for pursuing restructuring, successful corporate restructuring is a complex and exhaustive effort that is better served by a strong valuation of the business enterprise and/or the component pieces. Extensive valuation of company assets may provide a road map to the financial aspect of corporate restructuring and maximize the benefits of restructuring. It begins with an accurate understanding of the company’s assets to properly formulate the impact of corporate restructuring strategies. In this article, we will examine the different types of corporate restructuring, the reasons for restructuring, and the features of various strategies.
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.
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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 best corporate restructuring strategy for any given company will be based on the reason for the restructuring and the unique circumstances and characteristics of the company. Below are five examples of corporate restructuring strategies for which valuation has particular relevance:
- 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.
But even the corporate restructuring strategies that don’t involve transactions benefit from valuation services since it is difficult to determine what the best strategy will be in any given situation if the value of assets is unknown. A thorough valuation of the company and its assets will help guide leaders in making the best decisions. Divestiture of a particular division might offer the company greater financial advantage than a joint venture, for example. Only establishing the value of the enterprise and all of its parts will reveal the best corporate restructuring strategy for the particular circumstances.
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 Valentiam 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.
Source: Valentiam Group