Corporate Restructure – Step to survive during financial crisis

The importance of Corporate Restructure during economic fall

No one can deny the importance of change management. Most corporate bodies that endure over an extended period need to adapt to changing circumstances. During recent financial crisis, such changes were sudden and completely unexpected. Even when changes are gradual many organisations frequently fail to recognise them and to make the necessary changes in good time. It is these failures that lead for the need of corporate restructuring.

During such downturn state in Europe, Mideast and the other regions, multitudes of businesses like real estate and finance sectors have become victim of major economic fall. As such, it is imperative for survival to ‘Divide and Rule’ through Corporate Restructure. Other wise it will be too late to mend if the situation got worst.

Depending on the activities of the business, there can be different ways of Corporate Restructuring. Such as: Merger/Acquisition/ joint venture, Internal restructuring (eg. downsizing), Business expansion (eg. hiring new workforce), Relocation (eg. shifting the major business activity from Dubai to Abu dhabi where real estate financing is still prosperous), Outsourcing (eg. leasing a unit of business to contractors or subcontractors to operate), Off shoring/delocalization, Bankruptcy/closure, etc

The benefits & impact of Corporate Restructure on businesses

Conducting merger and acquisition through re-organisation of other businesses is a profitable opportunity for the company.
Shortly after the transaction is completed the properly restructured company begins to rise significantly in value, as a rule of ‘Survival of the Fittest’.
Restructure reduces the financing risk by diversifying the income streams and conceiving innovative finance solutions to re-ignite interest in unit sales.
A company that has been restructured effectively will be more efficient, better organized, and better focused on its core business with a revised strategic and financial plan.
Corporate restructuring reduces financial losses & tensions between debt and equity holders to facilitate a prompt resolution of a critical situation.

Risks of Corporate Restructure

Corporate restructuring is nearly always a costly financial process as it results in a reduction in the recorded value of assets.
Corporate restructuring often involves large compensation payments for forced employee dismissals.
Corporate restructuring is usually a painful and difficult task for the most accomplished management team who has strived hard to make its place.
Most corporate restructuring fails either because the measures taken are inadequate or because the timing is wrong (too late).

How to do successful Corporate Restructuring

• Make a proper business plan and detailed considerations of profits and losses.
• Figure out whether the company has enough liquidity to operate during the process of corporate restructure.
• A key part of getting successful corporate restructuring is gaining an accurate understanding of the business dynamics & market trends.
• It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations.
• Salaries are the largest part of any organization’s fixed costs, which all companies are still taking great pains to control. As such, now’s the time to get detailed about mapping out personnel expenses month by month, using measures like revenue per employee, and benefit costs per employee. Then, benchmark those measures against competitors in Banking and Finance sector to see how you compare.
• Understanding the market and technical dynamics of finance institutions is critical to the success of Corporate Restructure as what steps are required to be made to the business and how those steps are to be implemented.
• Rerevenue-producing areas should be invested first, like sales and marketing, or the areas that best match up with your strategy.
• The best way to avoid current market down cycle is careful assessment, planning and strategizing; plus some optimism, so the company won’t be caught bare-footed versus competitors when the pace of economic growth improves.

Illustration: For every major sector like Banking, Finance, Legal or Real estate, it is imperative to hire financial and legal advisors to assist in the transaction details and negotiation. It is also important to calculate the risk of corporate restructure and make exact forecasting of working capital. For instance, in a Banking sector, the best way is to rebuild the financial company around currently profitable and cash positive business units (like credit cards and short term personal loans), while cutting all the unprofitable units (like Auto finance or long term business loans).