Written By ————
Nitin Garg
Corporate Restructuring for Family Businesses
As the business world goes through changes, so too must the family business. For a variety of reasons, corporate restructuring has become more relevant than ever before. Some of the reasons could be growing family and divergent wishlists, need for reviewing existing business considering everchanging business environment, redundancies created due to years of practices requiring change, introduction of external stakeholders etc.
In this memo, we discuss the need for an appropriate corporate structure, specifically focussing on family-owned businesses and what considerations can be kept in mind to approach the design of same.
The Challenges of Family Businesses
Family businesses come with a unique set of challenges. Both family dynamics and business results must be taken into consideration, and there must be a clear handle on ensuring continuity of the family business from one generation to the next. Without proper structure, the business may lack the reins to be steered in the right direction and towards meeting its goals. As such, the failure of the family business is to an extent predetermined. In addition, traditional methods of operation may no longer be sufficient to meet the needs of a family business, so a change may be necessary.
What is Corporate Restructuring?
Corporate restructuring is the process of restructuring a company’s operations, people, strategies and strategies to ensure that it is better-positioned for growth and success. Restructuring involves changing the way the company is structured, its objectives, rules and regulations and its policies and processes to become more efficient, accommodate new market conditions, improve profitability, and increase shareholder value. Restructuring can also involve changes to the ownership structure, the elimination of redundancies and the consolidation of entities. Legally speaking, restructuring can be effected through mergers/demergers, sale of assets/businesses, share transfers, properties/real estate consolidation etc.
Why Corporate Restructuring is More Relevant Than Ever
In today’s ever-changing corporate environment, corporate restructuring is more relevant than ever before. It is no longer sufficient to simply keep the same structure and depend on traditions to lead the business through difficult times. Some of the key reasons which could possibly mandate corporate restructuring in family-owned businesses are capital raise (private or public, equity or debt), new business ventures requiring different family members to participate in different businesses, family separations, business consolidations etc.
To stay competitive and succeed in the marketplace, businesses must adapt and make necessary changes to their corporate structure. This enables them to gain a competitive edge, better manage risk, and be more adept in responding to changing market conditions.
The Benefits of Corporate Restructuring
Restructuring can help businesses in a variety of ways. It can help to ensure the business remains competitive, keep costs to a minimum, increase efficiency and streamline operations. It can maximize shareholder value by reducing debt and increasing profits. It can improve employee morale and performance by creating a better working environment, and it can help in managing risk. Finally, it can help the business attract and retain talent, as a more efficient and better functioning business is more attractive to potential top talent.
How to Go About Corporate Restructuring
Restructuring is often complex and requires careful planning. It is important to ensure that the structure selected is the best fit for managing the family business. The structure should allow for the continuity of quality family values and the autonomy of individual businesses. The most suitable structures may include family trusts, holding companies, joint ventures, blind pools, and consolidations. Starting point of any restructuring is to lay down the purposes which are intended to be achieved. Since any restructuring exercise is usually expensive, time consuming and eats up lot of top management bandwidth, definition of purpose becomes even more important.
Restructuring in family-owned business could be emotionally taxing and could be marred by vested personal interests. To deal with such issues, leadership team who can think for benefit of everyone can take the lead and help everyone understand the process. Another key issue relevant for family-owned business is family split. Lot of times, the structure needs to be created keeping potential split in mind, especially as the family grows bigger. Identification of key family assets such as businesses, real estate etc. is key steps, so that a structure aligned with maintenance and growth of each asset class can be created. Having a neutral advisor to help with restructuring exercise can be a useful tool to achieve the desired objectives.
In our experience, implementation of an agreed upon structure takes time and effort and can be a drain on resources. Effective use of project management teams and periodic reviews of the progress with family members is an effective way to ensure it is in line with the business’ current direction and that it provides the right direction for the business going forward. This can ensure the business remains profitable, competitive, and meets the goals and objectives set by the family.
Wrapping Up
Family businesses are a special type of business that demand a unique approach to corporate restructuring. To remain competitive and ensure the continuity of the business from one generation to the next, corporate restructuring has become increasingly important. When done correctly, it can help maximize shareholder value and improve efficiency, manage risk, and attract top talent. Taking the time to develop a suitable structure and review it regularly helps ensure the business remains profitable, competitive and continues to meet the family goals and objectives.
