"Corporate Operational Restructure"
Corporate restructuring is a complicated but rewarding exercise. Many do not have the stomach for it as it disrupts the status quo; humans tend to be creatures of habit and do not embrace change. If management can overcome their resistance to change, rewards can be forthcoming and can be significant.
Note: Restructuring a business entity can be a legal matter, financial matter, ownership matter or an operational matter. Only corporate “operational” restructuring will be addressed in this article.
DEFINING THE BUSINESS CYCLE
Corporate change is occurring every day and a typical business follows the same cycle of most other businesses in the free world. A business cycle may last months, years, or decades depending on the industry, market size, competition, presence of proprietary products, the economy, pricing strategies, mergers, etc.
There are typically 4 to 5 steps of any business cycle. These steps include:
1) Growth/Expansion/Boom phase;
2) Peak phase;
3) Downturn phase;
4) Trough phase;
5) And if you are lucky… a Recovery phase
This is the emblematic “S” curve that most management consultants will reference. Successful companies will have an overall trend line with a low standard deviation and a positive slope (exceeding inflation) through each full cycle. Although I believe every company has a birth, a life, and a death, the key to corporate longevity is corporate restructuring.
WHEN IS IT TIME FOR A CORPORATE RESTRUCTURE?
Some experts will say the perfect time to restructure a business is just before or during the "peak" phase or just before the "downturn" phase. Actually, anytime is a good time for a corporate restructure if you are experiencing any of the following:
1) Customers are unhappy (this can happen even during a growth phase)
2) Employee morale is low or employee turnover is high
3) Gross margin is in decline
4) Net Profit has stalled
5) Industry is changing
6) Competition is taking advantage of inefficiencies
7) Equipment, facilities, or personnel is being underutilized
8) The company has just been purchased
WHAT IS NEEDED FOR A SUCCESSFUL CORPORATE RESTRUCTURE?
To complete a successful corporate restructure, you must have the following:
1) Management willing to embrace the changes needed
2) Management that is competent with full communication & disclosure
3) Management willing to be held accountable and willing to hold others accountable
4) Enough liquidity and time to implement the restructure
If any of these four are missing, your restructure is doomed to failure.
WHAT DOES A GOOD CORPORATE RESTRUCTURE LOOK LIKE?
A good corporate restructure is much more than a cost cutting exercise. A successful corporate restructure will result in many of the following:
1) Higher customer satisfaction
2) Increased revenues
3) Reduced costs
4) Boosted employee morale and employee retention
5) Controls on cash
6) Full utilization of equipment, facilities, and staff
7) Optimal valuation if company is being positioned for merger or sale
The best strategy is to optimize the Product, People, Procedures, Price, and Profit which ultimately increases the value to the shareholders. A well restructured company is better organized, leaner, focused, accountable, more efficient, and strategically positioned. Many times a restructured public company will see an immediate uptick in the stock market once the restructuring is announced and privately held companies, especially if they are leveraged, will go up for sale… at a profit!
There are many executives who are good at cost-cutting but an optimal restructure performed by a seasoned professional is far more comprehensive and can build a significant amount of value and longevity to the company.
WHO PERFORMS A CORPORATE RESTRUCTURE?
The restructure can be completed by the CEO (or the COO) with the blessing of the board. The CEO will inform the board of his/her intentions and then proceed. In most companies, minor re-structuring is a daily undertaking. Some companies ask employees to continually be on alert for opportunities to increase efficiency and profitability and if that can be communicated back to the COO or CEO, then permanent change can occur.
But, far too often, the CEO and the COO are in deep with keeping the operation going full speed ahead, especially in today’s fast-moving, dynamic market place. That is where a senior restructuring executive is invaluable. The process can then be completed with an absolute unbiased opinion of the status quo and often times can invoke accountability upon management. An added bonus is introduced when a valuation analyst is involved to assess stock value, looking at ways of increasing the value by increasing the benefit stream and reducing the risk. It is highly recommended that companies who are engaged in M&A use a corporate restructure executive (skilled in valuation principles) before and after their acquisitions to build value.
HOW IS A CORPORATE RESTRUCTURE DONE?
A good restructure will include at a minimum the following steps:
1) Meeting with management to identify aggregate problems and set quantifiable goals
2) An operational audit (most restructure executives have their own checklist)
3) Determining if the company has enough liquidity to complete a restructure
4) Interviewing key managers and personnel
5) Surveying customers (if applicable)
6) Setting a course of action which may include changes to:
a) the Organizational Chart
b) the Business Plan
c) Job descriptions & accountability platforms
d) Incentive plans
e) Negotiations
f) Terminations
g) Liquidations
h) Outsourcing
i) Cost saving measures
j) Equipment and facility utilization
k) Pricing models
l) Purchasing protocols
7) Execution with quantifiable results
RESTRUCTURING DEPARTMENTS VS. RESTRUCTURING COMPANIES
A department within a public company is similar to a privately held company. The owner is the public company and the department manager is the CEO/COO of that department. The department has raw goods coming in that can be tangible (e.g. raw materials in a warehouse) or intangible (e.g. data or information coming from another department). The purpose of the department is to take these tangible or intangible goods and create value for their customer. The department’s customer might be another department, a subsidiary, or an officer of the public company.
Treating the department as a privately held company simplifies matters and sometimes restructuring a department is the easier of the two. When working within a department, the public company’s CEO is typically on board because the department restructure doesn’t affect the management of the overall entity and therefore there is little opposition, unlike the vested stockholder/owner of a private company who can have emotional resistance. This is why owners of privately held companies usually wait until the “trough” phase of the business cycle before they will embrace the changes needed, sometimes acting too late.
RESTRUCTURING FOR M&A PURPOSES
Before an acquisition, a corporate buyer completes a valuation based on normalizing financials, re-casting line items, determining the market value of assets, comparing guideline company market data, and calculating capitalization rates based on company and industry risk components. This sets a bar of what the parent company is willing to pay, assuming they will receive the added benefit of their synergies, market advancements, and restructuring efficiencies. (In the case of a public company buying a private entity, the parent will also gain the difference in their current market Price/Earnings ratio versus the private company’s much lower multiplier, due to its increased risk of lack of liquidity and lack of marketability.)
Restructuring after an acquisition can dramatically increase the value of the subsidiary. Huge gains and opportunities arise when new owners can seize the changes needed. Changes of this sort can sometimes double or triple the value of an organization overnight, positioning the acquired company for a quick, profitable sale. Restructuring of this magnitude could include selling off assets, consolidating departments or management, liquidating inventories, streamlining processes, amalgamating facilities, or combining purchasing power… all dropping significant profits to the bottom line, resulting in a surge in shareholder value.
Robert T. Hulet is the President of Business Valuation Solutions, LLC in Pacific Grove, California. He has consulted over 200 companies throughout the U.S. and Canada. Since 2011, he has focused on business valuations and business consulting; also acting as interim management in the positions of COO, CFO, Exec. VP, Board Member & Executive Director on occasion. He has personally started, bought, or sold twelve companies. He is also a private equity investor in multiple companies within the automotive, agriculture, and technology sectors, and is on the Board of Directors of several private companies. He has significant experience in preparing certified business valuations for marital dissolution or shareholder disagreements and for shareholder buyouts, stock sales, and preparing companies for sale. He is a national Financial Planning & Analysis (FP&A) contractor for corporations nationwide. He has completed engagements for corporate restructuring, strategic planning, budget analysis, operations management, business development, cost/benefit analysis, and mergers & acquisition while educating management and negotiating teams. Prior to 2011, Mr. Hulet was the President/CEO of a multi-million-dollar, multi-location U.S. based import/distribution company for over 20 years. He earned four business degrees from the University of Arizona; Accounting, Finance, Management Information Systems, & General Business and has taken additional course work at Cal State University, Fullerton in the area of professional fiduciary management.