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How does restructuring work?

On Behalf of | Jan 12, 2021 | Franchise Law |

While the country is on the verge of a recession, many companies in Florida and throughout the country are restructuring. This is the procedure of a company improving its financial operation due to financial pressure. This corporate action mostly affects the debt and structure of the firm while improving its economic status.

There are two types of restructuring. Financial restructuring is used when the debt of the company is high. It involves selling assets, issuing equities and closing debts. Organizational restructuring involves layoffs, unpaid leaves or even changes to the business location.

Financial restructuring

When a company experiences a decrease in sales, financial restructuring is likely. Companies that adopt this method usually had a prior rise in debt, and the sales started decreasing. Since the company can’t pay the fixed annual interests, it decides to reduce the debt and increase equity. Additionally, if a business owner decides to undertake a project where they are unsure about the profits, they can decide to use debt financing. The debt will be repaid from returns of the project while the firm benefits from the profit.

Organizational restructuring

Organizational restructuring aims at reducing operating costs. If the corporate chain is long, it requires more funds to maintain. The reorganization acts by laying off inefficient employees. Additionally, those in top positions can face a salary cut to increase revenue in the company.

How restructuring works

The board of directors needs first to discuss the pros and cons of the restructuring. Once they agree, external advisors are hired to create a beneficial restructuring scheme. When a company has several business ventures, the directors can decide to sell those that are not profitable. Advisors will also guide the best restructuring method. They can either decide on reducing debts or increasing equity. According to business law professionals, restructuring an organization typically enhances profitability.

Is your business making losses? You may want to contact an attorney for more advice on how restructuring might help you.