Reorganization and restructuring a business can be either an alternative to bankruptcy or done in conjunction with a bankruptcy for a going concern. A “going concern” is a business that is or would be able to function even though it might have serious liquidity problems. For example, a grocery store with plenty of customers is a going concern, but if the store’s debt load prevents it from getting necessary credit it might need a restructuring or reorganization. Done at the proper time, a reorganization and restructuring can extend the life of a company facing imminent bankruptcy, or even forestall a bankruptcy entirely. Alternatively, a company that has already declared bankruptcy can use the breathing space provided by the automatic stay to restructure the business and its debts so as to emerge from bankruptcy as a healthy going concern.
Reorganization and restructuring typically refers to a company’s debts—but it can also refer to a company’s equity structure, labor force, and every other aspect of the business. In a reorganization, everything about a business is examined to determine whether, and how, it should be a part of the new business that emerges from the bankruptcy. Debt in particular can be reorganized or restructured through, for example, extending credit lines or negotiating with suppliers to continue providing materials to keep the organization afloat. Restructuring can also include reducing or increasing the number of branches, reconstituting the board, or even selling off shares to the public or a significant shareholder.
While restructuring can be done outside of bankruptcy, the Bankruptcy Code gives the Debtor additional tools to use in restructuring that are unavailable outside of bankruptcy. At JRFPC, our knowledge of the benefits and drawbacks of these tools help us guide our clients through the choice to file for bankruptcy or pursue reorganization outside of bankruptcy.
Steps of Reorganizations
Many states allow for companies to reorganize their affairs rather than face liquidation. A reorganization commonly involves getting new terms on loans and staggering payments. This process is also supported by the Bankruptcy Code, which sees liquidation as the last step in a troubled organization.
Most of the reorganization steps start internally. These steps include a thorough financial and personnel review, a review of all contracts, and other analysis to fully understand the state of the company. This can and should be done with a bankruptcy attorney or reorganization specialist. Additional consultants, such as efficiency experts, can also sometimes be helpful at this juncture.
Once a legal process commences, and the bankruptcy court rules that there is a need for reorganization, the Debtor will put forward a plan to be approved. Creditors will have the opportunity to object to the plan. Eventually, however, the plan allows the Debtor to pay creditors in an orderly fashion and simultaneously reorganize itself.
Once a company secures new credit repayment schedules, the company can then move to seal the holes that led to the problem or challenges it is facing. This can include restructuring the organization, changing the management of the firm, or reducing the workforce.
Restructuring debt is by no means the only facet of a reorganization, however. Any plan for reorganization would need to be approved by the company’s board of directors and other stakeholders. That can be a delicate process as different stakeholders may have different—and sometimes competing—goals. Another extremely important aspect of reorganization is examining the tax repercussions of various strategies. All in all, the steps to preparing and implementing a reorganization can be complex and require skilled attorneys and other professionals to implement.
Things to look out for before you reorganize your company
Before a company enters reorganization, there are vital issues that our attorneys look out for to ensure the company does not revert to a troubled status. A bankruptcy court and Creditor’s Committee in a Chapter 11 Bankruptcy will also weigh in on some of these issues.
- Does the organization have the capacity to remain afloat? In other words, are the organization’s difficulties due to problems within the company itself, such as a how debt is organized or an overstaffed work force, or are they due to industry changes? If the collapse is a result of a sweeping change in the fortunes of an industry, or massive national or global changes, a reorganization might not stem the losses and would eventually be futile.
- Is the business model being used the main reason the business is failing? The reorganization team can look at how the company has been conducting business. If most of the sales were coming from one area of focus, they might recommend casting the net wider. This is part of the restructuring plan that can lead the company into new areas and adopting a new business model.
- Would the company shareholders achieve more if the company was liquidated rather than extending its life? Rather than waiting until the value of the company is too low, our attorneys might float an idea of immediate liquidation to shield the owners and shareholders from losing the value of their work. This calculation takes into account the amount the company owes and how much workers would be paid.
- Is there an option for merger and acquisition? Some business organizations move into mergers to expand their reach and change how they attack the market.
When to Restructure a Business Organization
There are specific reasons that lead a company to restructure. Most of these reasons are based on the need to reduce the costs of running a business as well as ensuring the company is making business sense in the field.
- Reduce operational costs: This includes reducing the number of employees, the cost of running different outlets, cutting non-profitable operations, and focusing on the core business.
- Improve its competitive advantage: This usually involves shifting the business focus to the core business of the organization.
- Prepare for a merger with another company: When a new company comes on board, there are casualties, mainly managers and staff. This means a company that merges with another has to reduce duplication of roles and jobs overlay. In most cases, mergers lead to loss of jobs.
- Weed out some dead wood, including inside the board: Some organizations are run by boards that aren’t in tune with the mission of the organization. Restructuring helps introduce some new energy and new ideas in running the company. It also helps in reducing the influence of some board members who have not had a significant or positive impact on the team.
- Introduce new technologies: When there is a need to introduce new technologies that will help run the company, an organization is forced to lay off some staff or even add new business models that will push the organization to greater productivity and profits.
- Introduce a new strategic partner: This can be different from a merger, or it can be in the form of a merger. This is where a company gets engaged with a new partner in doing business that will help it get into new areas of focus. When this happens, the company needs to restructure its goals and mission to be in tandem with the new partner.