Even the biggest names in NZ business have to restructure. Recent headlines have seen NZ Post, BNZ and even the Ministry of Business, Innovation and Employment undergo or consider the restructuring process in order to improve efficiency and profitability.
A corporate restructuring can turn an unprofitable business into a true success - but directors have to know when it is necessary. These signs could help.
When a branch system fails to deliver results
The NZ Herald reported last year that in the previous five years, Kiwi banks had seen more than 150 branches close. This highlights a common risk that can lead to restructuring - a company spreading itself too thin. This is particularly a concern for SMEs, who can see margins erode when growth isn't planned properly.
When is a business going to have to consider restructuring?Companies that have branched out but not seen strong returns may have to put restructuring on the table in the future, consolidating their branches and focusing on attracting bigger business to fewer locations.
This requires careful planning to protect the brand, company reputation, and customer relationships. Cashflow forecasting is another important element here and remember - if managed well, consolidation and asset divestment can bring significant gains.
When part of the business is unprofitable (and your company is technically insolvent)
A common query we receive from accountants follows the hive down model. This is essentially where a struggling company is placed into liquidation, and the best parts of that business are purchased back as a going concern from the liquidator in a new company structure.This purchase must occur at fair market value, as determined by an independent party, and there are careful steps to take.
The purchasing entity is often a "phoenix" company, if the same (or a similar) company or trade name is used and the previous director is in a management position. This new company has an obligation to issue a successor company notice within 20 working days of the purchase - when this occurs, it gives the director of the new company (successor company) protection from personal liability. It also informs suppliers they are dealing with a new entity, and need new trade terms. A similar system can also apply to a management buyout, where the purchaser wishes to buy assets rather than shares.
If one branch, franchise or level of the business is not working, it may be worth discussing the concept of a restructure with directors, and considering a potential 'hive down' process.
SMEs need to consider the long-term cost and impact of a restructure, including:
- Restraints of trade
- Transferability of contracts
- Staff retention
- Customer / supplier support
- License renewal
- Retention of tax losses
Before acting, directors must be clear on what they stand to gain and lose by restructuring.
When the market is disrupted
The rapid evolution of technology means market disruption can happen quickly, and it can happen anywhere. Look no further than Uber and Lyft's takeover of the taxi market, the rise of FinTech, or the demise of Kodak and Blackberry. A recent PwC paper noted that digital disruption has forced even the biggest of companies to look at their core structure to find ways to adapt.
Disruption can make goods or services obsolete, and render a business incapable of delivery within the same timeframe as disruptive competitors. When new tech enters the fray, it may be time to consider restructuring. Look at Kodak, one of the biggest brands of the 1990s. They failed to adapt to the advent of digital photography, while companies like FujiFilm embraced the disruptive tech and transformed.
These are just a handful of occurrences where restructuring a business may be required. Essentially, any large-scale threat that looms could be cause for big changes. If you have any concerns about the sustainability of a company's structure, contact the team at McDonald Vague.