Corporate restructuring is the process of reorganizing a company’s management, finances, and operations to improve the efficiency and effectiveness of the company and increase shareholder value.  These changes can also help a business increase productivity, improve the quality of products and services, and reduce costs. The overall goal of restructuring is to reposition the business, so it is once again positioned for success.

In today’s unpredictable business environment, corporations embark on a restructuring for many reasons. These include sub-par revenue growth and/or earnings performance, excessive debt, declining market conditions, and increased competition. Companies also undergo restructuring to achieve specific objectives, such as to tap into new growth channels, reduce costs, or to be able to respond more rapidly to competitive changes in the marketplace.

As a CFO with 30+ years of experience in both venture and private equity based private and public consumer-based businesses, I have personally witnessed both successful and unsuccessful restructurings. Restructuring is more likely to be successful when managers first understand the fundamental business or strategic problem their company faces. One of the biggest mistakes in restructuring is not having a clear vision, purpose and objectives for the change.  Without clarity, you risk creating confusion, mistrust and resistance among your employees and other stakeholders.

Ideally, you should start with articulating your business strategy, then identify strengths and weaknesses in your company’s operating model and financial structure. You then want to consider the best strategies for making improvements and design a new business model. After communicating the upcoming changes to the organization, you are then ready to launch necessary changes, adjusting these as necessary, over time.

Management Restructurings 

Often the composition and organization of a company’s human resources no longer fit the needs of the organization.  This can result from changes in the marketplace that require managers and employees with different skill sets. And sometimes legacy team members remain too committed to just one path forward and aren’t open to exploring new and different approaches which more appropriately address changes in the market and in competitive dynamics.

“Management restructuring” refers to the process of reconfiguring a company’s hierarchy, internal structure and reporting relationships.  This process requires a top to bottom reassessment of the positions required and the best organizational structure to support their success.  This can result in shifting direct reports to another manager or a different part of the organization and reallocating resources to other parts of the business where opportunities may be greater.  In determining which changes to be made, the focus of any management restructuring should always be on how to best serve the client, whether they be inside or outside the company.  Once that is determined, existing personnel can be slotted into the positions that best utilize their skills and experience levels.

In most management reevaluations, there will likely be some employees that just don’t fit the needs of the restructured organization. Unfortunately, these employees will need to be terminated. What is important here is that the optimal organizational structure is determined first. Managers must resist the temptation of trying to find positions in the new organization for all existing employees. Sub-optimizing the correct organizational structure to protect incumbent employees can negate many of the benefits that will accrue from the new organization.

In the first few months following a company’s organizational changes, it’s very important to keep a close eye on employee performance and engagement.  Even in the best of circumstances, it’s likely that some employees in their new assignment may not work out, either because the employee has trouble adapting to his or her new responsibilities or for other reasons. Quickly flagging these situations will enable appropriate changes to be made to remedy these situations. 

Financial Restructurings

A second type of company restructuring involves the capital structure of the business. Often the need for financial restructuring arises out of the need to reduce the company’s outstanding liabilities. Financial restructurings are often used by companies that are facing difficulties paying their debts. In a financial restructuring process, debt obligations are spread out over a longer period of time which typically result in smaller periodic interest payments (potentially sometimes offset by a higher interest rate). As part of the process, some creditors may also agree to exchange some of company debt for equity in the business.  For creditors, who would prefer to avoid foreclosure of the business and that it continue operations it until it can be sold downstream, this can be a far better outcome, particularly if the company’s equity turns out to have long-term value.

Before beginning a financial restructuring process, the management team should update the company’s business plan. This includes developing a detailed cash forecast, covering at least the next six months to ensure the company has sufficient liquidity to operate during the implementation of the restructuring.  If the company’s cash flows do not allow for this, this will need to be taken into consideration and resolved before moving forward. During the restructuring process, it’s critical that the company maintain clear lines of communication with all its creditors.

Operational Restructurings

A third way of restructuring is probably the most complex as it embraces a partial or full scope of operations at a company. In broad strokes, “operational restructuring” focuses on making changes to the company’s business strategy to make it more competitive in the marketplace.  This can include making reductions in cost in both the supply chain serving the business as well as in the company’s direct workforce, refocusing company priorities towards certain products and services, and/or establishing new sales channels around new products to be sold either directly or through joint ventures or other alliances.

Operational restructuring is the riskiest of the three restructuring pathways because there is a greater opportunity to impact employee morale and engagement, cause operational disruptions, reputational damage, legal issues, and loss of talent.

Why Do Restructurings Sometimes Fail?

Restructuring management teams and employee workforces, capital structures and operations are fraught with risk, particularly on the executional front.

Often failure to achieve the objectives of a restructuring occurs because the leaders of the restructuring effort don’t specify their objectives clearly enough to their teams. Sometimes they miss some key actions (like forgetting or not fully understanding certain business processes). And managers sometimes choose to pursue things in the incorrect order (such as choosing the way forward without assessing organizational strengths and weaknesses).

In my experience, the best way to mitigate these risks is by keeping employees fully engaged during the restructuring process. This is critical in avoiding the failure of all three types of restructuring initiatives. Savvy managers will always accurately anticipate normal human responses to change, allow time for feedback and discussion, consistently over communicate as to what’s next on the horizon and the effects these changes imply, internally and externally, and reinforce high performance expectations during the restructuring period.

If your company is facing a market or competitive shift mandating restructuring, do reach out to us at FLG. Our deep level of experience planning and executing restructuring initiatives across industry sectors and business models can be an invaluable asset as your team and board works through a restructuring plan.

Mark Archer

Mark Archer joined FLG in 2021 and has spent over 30 years serving as Chief Financial Officer or President at many consumer-centric businesses. He has been a CFO at both private and public companies, and has built financial organizations in start-ups to managing teams as large as 350 people in…Read More