Why do companies reorganise?

Why do companies reorganise?

Businesses today operate in a landscape of challenges and change. Owners who periodically review and reset their structure are best placed to exploit changing circumstances and new opportunities. 

There are a wide spectrum of circumstances where reviewing and reorganising your business structure can help your business achieve greater profitability, harness efficiencies, manage risk, reduce tax liabilities and help you realign your business and personal goals.

What does company reorganisation mean?

The term 'company reorganisation' is generally used when a company rearranges or changes its company structure or business model as a planned part of their business strategy. Company reorganisation is often used as a way to split off parts of a business into separate companies, help increase efficiency and profits or to ring fence risk in a business.

What is the difference between company reorganisation and corporate restructuring?

Group reorganisations don't have to be significant changes, they can often entail small changes to the organisation of a business for example, creating a holding company, creating or moving a subsidiary company within the group, moving assets around the group, or a reorganisation of debt.

Business restructuring is often linked to companies that are in financial difficulties. Company restructuring often means changing the organisation of the company completely or creating a group structure. For example, financial restructuring is used to reduce debt, increase efficiency or other changes to modify and reshape operations.

In this blog we are covering business reorganisation, the reasons why you may consider it and the benefits a reorganisation can achieve for your business.

How does company reorganisation work? 

This will depend on the reasons why you are needing to reorganise.

Why do companies reorganise?

Reviewing your company configuration should be considered every time your business prepares to or goes through a significant change or new phase in its life cycle.

There can be several reasons for example:

• Periods of fast growth.

• After mergers and acquisitions.

• A need to improve tax efficiency.

• Working capital improvement and recapitalisation.

• A need to consolidate parts of your business.

• To ring fence risk (for example when developing and launching new products, when purchasing new assets such as property or ring fencing financial risk).

• Changes in market conditions.

• To resolve shareholder disputes or manage existing shareholders needs

• Rationalising your business structure

• Transferring ownership or transfer of assets.

• Exit planning and succession planning.

What are the types of reorganisation a company can do?

Company reorganisation can take many forms and there are a variety of structures that companies can use. This will depend on what you wish to achieve. The main types of company reorganisation include:

• consolidating businesses into a group structure

• establishing a new holding company/parent company

• share reorganisation

• demerging or splitting a group.

Benefits of company reorganisation

Reviewing your current business model and subsequently reorganising your business structure can ensure that your assets and resources are performing to their best potential. 

Reorganisation enables you to change the ownership, operational, capital, tax and legal aspects of your company to align your organisation to your long-term goals and personal wealth objectives. 

There can be many additional benefits of reorganisation including:

1. Remove obstacles to growth.

2. Reduce costs.

3. Enter new markets.

4. Expand internationally.

5. Fill performance gaps.

6. Improve business processes.

7. Increase revenues and profits.

8. Improve cash flow.

9. Improve business performance & culture following a merger or acquisition.

10. Provide flexibility for exit and succession.

Reorganising for fast growth

If you are running a fast growth business, it is critical to pause and review the way your company is structured.

Rapid growth creates a need to review and potentially implement a business restructure in areas such as:

The way you are capitalised - to avoid the risk of overtrading.

How your assets are held - for example, do you need to hold property differently or create a holding company to protect stable parts of the business from riskier new ventures.

Employee share schemes - whether the time is right to issue or review share schemes.

Profits - how you move profits around tax-efficiently within a group.

How you are remunerated - making sure you extract profits tax efficiently and exploit all the tax reliefs available to you.

International expansion - making sure any subsidiaries sit in the right place within your structure.

Reorganising for exit and succession

If your company structure is complicated, it may be worthwhile 'tidying up' your business model well in advance of your exit and succession. You may want to look at merging parts of the group for simplicity before a business sale or split off assets such as property prior to sale into a new holding company that is separate from the main trading company you are looking to sell.

If you are planning to pass your business to different family members or the next generation, then you may need to change your current model and structure to enable you to pass different parts of the business to different people.

It is critical to ensure before you sell your business that your management team are on board and you can retain them for consistency during and after the sale. Reorganising shares to ensure that your key management team and shareholders are secured prior to sale can be critical to improve the value of the business and guarantee its future.

When thinking of the future of your business and your possible retirement or succession, it’s essential to review all the working parts to put you in the best position both commercially and from a tax perspective.

Reogransation can be done tax-efficiently

Any reorganisation needs to be undertaken with careful planning. It is often possible to undertake a reorganisation in a tax efficient manner that will limit tax exposure. However, prior to any changes in a business structure, you will need to gain advanced clearances from HMRC. So, we recommend you seek professional advice, from tax professionals such as Haines Watts.

Get advice on business reorganisation from Haines Watts

Haines Watts provides support and advice for companies in all sectors and sizes around business strategy and structure. If you need to review your business organisation and are considering a new structure for your business, then contact us today.

For more information on business reorganisation, then read our Business Structuring Guide today. It contains examples of how we've helped business owners change their business structure for a wide variety of reasons and the outcome we have achieved for our clients.

For more help and advice, contact our team in Wirral, Chester or Liverpool.

Conclusion

As your business grows, you may find your current structure isn't fit for purposes, increases risks or doesn't provide the flexibility you require. Restructuring your business can enable you to remove obstacles to growth, reduce costs, enter new markets, fill performance gaps, improve business processes, increase revenues and profits, and even avoid running out of cash altogether.

Reorganising your business structure can provide provide many potential benefits. However, careful consideration needs to be given to the consequences of a reorganisation on you, other shareholders, your family, your ongoing business and tax implications.