What is “Corporate Restructure”?
Restructuring a corporation is a term for when a small, medium, or larger business takes actions intended to improve their financial situation and/or get them out of financial jeopardy. A corporate restructure can include the modification of a company’s capital structure, the way it manages its business operations, debt, or some combination of all of these business elements.
Types of restructuring include:
- Separating your SME into different entities. Separating your business from your personal assets and isolating different parts of your company is a common form of company restructuring. Doing so protects you from individuals or corporations receiving your personal assets if they were to take litigation against you in cases of your business performing poorly.
- Divestment and spin-offs. For companies looking to consolidate, you may consider selling off aspects of your SME to a third-party to cover debts or free up cash flow. You may choose to close aspects of your business entirely to mitigate damage to your reputation or cut your losses. You can also consider restructuring units of your company to be standalone entities which you partially own, known as “spin-offs”.
- Mergers and acquisitions. For companies that want to grow, merging another existing business with yours and absorbing their assets can increase the profitability of a small business, as well as extending your market reach.
- Debt restructuring. Debt restructuring for businesses facing financial turmoil involves taking certain actions to avoid bankruptcy, insolvency, or liquidation. This includes actions such as negotiating with creditors for lower interest rates, having due dates extended, consolidating, invoice financing and refinancing solutions, or other debt-for-equity swaps.
- Relocation. Depending on the nature of your industry, you may decide to relocate your business to find a more appropriate customer-base for your business model. You could also make the choice to relocate your office to cut costs or find bigger premises. Similarly, you may choose to relocate your production process to reduce expenditure and/or improve the quality of your product.
How and why it’s important to set up your business’ structure correctly
As mentioned above, getting your corporation’s structure right is imperative for protecting your assets and your personal liability if creditors or individuals were to take legal action against your business. But it is also important for your tax position. A beneficial business structure can help you to avoid certain unnecessary tax liabilities, as well as enabling you to take advantage of potential tax grants, subsidies, and incentives.
For example, if a business were to set up a corporate beneficiary by funnelling excess profits to a discretionary family trust, it could cut its payable tax by up to 19%. This is in alignment with section 100A of the Income Tax Assessment Act 1936. It’s applicable to what is referred to as a “reimbursement agreement” between a trustee who receives a benefit from a trust, and another person who is entitled to assessable income.
As dividends are passive income, all income received by a corporate beneficiary is taxed at the standard 30% company tax rate, rather than the marginal rate of up to 49% that may otherwise apply.
How do I restructure my business?
It is strongly recommended that you seek professional business and accounting advice from a reputable advisory firm, such as our team at Equil Advisory, or a registered liquidator such as Hogan Sprowles, before attempting business restructuring.
Corporate restructuring is something that should be organised on a case-by-case basis. There is no one-size-fits-all solution. Each unique corporation requires an in-depth analysis of its current corporate structure in order to best understand the unique needs of the directors, employees, investors, and the company as a whole.
6 signs you might need to restructure your business
There are several tell-tale signs that could indicate that your business may need a structuring overhaul:
- Stagnating growth. Looking to improve your profit margin and expand your small to medium enterprise’s market reach? Restructuring could help you to grow your business faster and more cohesively.
- Competitive underperformance. Whether it’s relocating your production process, a potential merger, or something else – if your business is performing poorly, a restructure could help you to get ahead of the competition.
- Shortage of cash flow. As mentioned earlier, you can free up company cash flow via debt restructuring processes, divestment, business restructure restructuring, and more. A lack of cash flow can negatively impact a business in a multitude of ways, and a restructure is often the best and quickest solution.
- Loss of revenue. If your revenue is consistently significantly lower than it has been in previous months or years, it’s an obvious indicator that something is no longer working. Altering your business’ structure, such as reducing your production costs, or changing your product offering, can help you to keep abreast of an ever-changing market.
- Inefficiency. If your business isn’t being efficient with its time management, restructuring your operations, such as introducing a new fintech, could improve your company’s time spent in certain areas. It could also potentially help you to identify any issues your company is facing that you were previously unaware of.
- Poor employee retainment. If you have a high employee turnover, this could be a sign that your business requires a restructure. There are a number of reasons that employees leave their jobs, and equally numerous solutions that you can implement to make their work environment more stable and appealing.
Pros and cons of restructuring your business
Restructuring your business in times of financial strain or economic downturn can often be an effective means of turning things around for the better, but it doesn’t necessarily follow that that is always the case.
Just as a restructure can make your business, it may also in some instances break it. See below for how a restructure can benefit your corporation, and what to watch out for.
While every business will see its own unique benefits of corporate restructuring, here are some of the most common advantages.
- Asset protection. As mentioned earlier, protecting your personal assets is a major benefit to corporate restructuring. If you own your business personally, these assets would be at risk if your business were to face legal action. Separating your business into different entities mitigates this risk.
- Tax implications and business grants. Restructuring your business, such as separating your business into individual entities, can be beneficial when it comes to how much your business is taxed, as well as improving flexibility for the distribution of taxable income. Separate business subsidiaries are also entitled to their own unique tax grants, such as those offered as a result of the COVID-19 pandemic.
- Accelerate business growth. When looking to accelerate business growth, you first need to assess and audit your current business structure, and identify any pain points that might benefit from the process of restructuring. Once you have identified these points, you can make the structural changes necessary to grow your business.
- Better communication. Talking with your customers and employees is important for identifying aspects of your SME that would benefit from change. This opens better lines of communication, solidifies customer relationships, and improves workplace morale
- Increase efficiency. Removing or reconfiguring roadblocks and aspects of your business that are slowing you down helps to increase productivity within your workforce. You can also often increase efficiency within your operations by adding new technologies, such as bookkeeping fintech.
- Improve cash flow. Decreasing your operational costs, streamlining your accounting, restructuring your debt, taking advantage of tax incentives, etc – can all improve your company’s cash flow exponentially.
- Increase revenue. Reassessing your product offering, marketing approach or location could see significant those long awaited spikes in your revenue stream.
- Selling your business. If you’re looking to sell your small business, a restructure can make it ultimately more appealing to buyers. Delivering a fully formed and comprehensive business model will ultimately benefit you in terms of profiting from the sale.
While corporate restructuring is performed with the intention of improving a business, mistakes and collateral damage are not uncommon.
- Loss of productivity. Downsizing your company could result in a loss of productivity if you let go of key skilled workers. Retraining new employees also requires time and financial resources. It’s therefore important to make careful assessments before taking action.
- Damage to morale. If you replace certain employees – such as your accounting team – with technology, you may find that your remaining workers experience a dip in morale. This can lead to poor customer service and a potentially toxic work environment.
- Expense. Retraining, fintech investment, or moving premises, can all incur short-term costs; even if the outcome is long term capital gain. Not having the immediate cash flow required to cover these expenses could mean taking out further debt on your business, or leave you stuck in a rut with fewer means of restructuring.
- Non-compliance. Attempting to restructure your debt or approach potential tax concessions without first seeking professional advice may land you in hot water when it comes to compliance. Thankfully, this can generally be easily avoided by seeking help from a reputable source first.
If you’re considering corporate restructuring as a means to save or improve your SME, it is important to weigh up all of your restructuring options carefully, as well as thoroughly auditing your business to identify potential areas of concern, prior to doing so.
As mentioned above, it is also highly recommended that you seek professional business and accounting advice and support from a reputable company. This is true to both existing business owners, and for entrepreneurs that are looking to start their own business.
Seeking professional advice before setting up a new business will enable you to get your business up and running with the best possible structure from the get go, and will likely save you the hassle of having to restructure later on down the line.
Our team at Equil Advisory can provide you with a tailored comprehensive structural outline for your unique business, for a reasonable fee. Get in touch today to find out more.