Is It Time to Consider a Company Reorganization?
The world's always changing, which means your business needs to evolve, too. Through a company reorganization, you alter your organization's ownership, legal structure, business model or management. There are several ways to do so depending on your goals. Here's an overview so you can decide whether it's time to reorganize and how.
Primary reasons for reorganization
Companies consider reorganization in the face of a major change to their business environment. This could be the rise of tough competitors, new government regulations, to take advantage of new market opportunities or to better utilize technological advancements.
Companies also reorganize when they're struggling. They aren't hitting their performance measurements as well as in the past, and they hope to improve by restructuring some part of their operations, management and ownership.
There also could be opportunities to grow through a reorganization with another company, as part of a merger or acquisition. This can create efficiencies of scale by combining resources.
Company reorganization types
There's a range of different ways companies reorganize, and which one you choose depends on your business's unique needs. Some of the most common types of reorganization include:
- Mergers and acquisitions – In both mergers and acquisitions, you and another company combine to become a new joint organization. A merger tends to be more of a partnership, whereas an acquisition is when one company takes over another, but the end result is the same: You create one organization that then owns both companies' assets.
- Asset divestment and spinoffs – You can also remove divisions from your company. With divestment, you sell off a division and its assets to another company, perhaps because it was underperforming and your business no longer wants to handle that market. In a spinoff, you turn the division into its own standalone company so it has a little more flexibility to operate, but your organization still owns it.
- Management shifts – Another way to reorganize is by adjusting the management style in your organizational chart. For example, switching from a vertical system, with people reporting up and down through many different layers of management, to a more horizontal system, where there's less hierarchy and less of a reporting gap between employees and the top leadership.
- Downsizing – If your organization is financially struggling, you may need to downsize your workforce, especially if one area is no longer delivering.
- Legal and financial restructuring – You could change your legal and financial structure, like by converting your company legal structure to a C-Corporation as you prepare for a future initial public offering, or IPO for short, or by trying to restructure your outstanding corporate debt to a longer payment term.
- Business repositioning and turnarounds – Repositioning is when you try to change parts of your brand and business model, such as going from a subscription sales model to charging hourly consulting fees. A turnaround is when you completely overhaul your operations, products and services because changing conditions have put you in financial distress.
Key indicators it may be worth reorganizing
Whether reorganizing makes sense ultimately depends on your unique situation, but there are some common indicators it may be worth it:
- There's been a major change to your business landscape. A new game-changing technology, an emerging trade war, a shift in client demand—if the market has changed dramatically, your business may need to pivot as well. This could mean repositioning your business model or going through a turnaround, as well as reorganizing your management system.
- Your performance isn't what it used to be. If you're failing to hit your benchmarks and growth has stalled, it could be because your organization structure no longer works so your management and/or operations should be reorganized.
- You're seeing inefficiencies and employee struggles. If you're facing high turnover and low efficiencies with financial and employee performance, this could be a sign your systems no longer work. You may need to downsize or divest departments that no longer hit their numbers.
- Restructuring seems like a better option than anything internal. When your business is struggling, and it doesn't seem like there are any clear internal solutions, restructuring could be the answer. It may be time to make a big move like combining with a competitor in a merger, divesting struggling departments or trying to free up resources through a financial restructuring.
- You see a clear opportunity. Reorganizing could take your company to another level, such as, by opening new markets with another brand/product, gaining market share through an acquisition, or legally restructuring to bring on new investors through an IPO.
Ultimately, a company reorganization is a big decision that you'll need to research carefully. Make sure you have a trusted financial partner in your corner when deciding whether and how to undertake this major step.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.