Why and how will businesses need to restructure in 2021? The disruption caused by the pandemic and economic slowdown is difficult to exaggerate. As an ative consultancy company, we are working with a number of corporations, previously healthy and thriving businesses, who are facing acute liquidity crises launching management teams into turmoil. Liquidity planning, annual budgets and covenant forecasts have been rendered obsolete in a very short period and companies are clambering to raise capital and ride through the storm.
These companies, in our case small to medium businesses in a wide range of industries, are in the middle of or planning a restructure process. But what is the biggest culprit? Macroeconomic slowdown and the consequential financial distress. These are closely followed by changes in strategic goals, regulatory or political issues, the need to streamline operations and, last but not least, corporate expansion.
Why will they need to restructure?
Research carried out by Acuris suggests that corporate restructuring will become an increasing priority for a large numbers of businesses, and that defensive activity will be a priority. Businesses worried about uncertainty and volatility are focusing on reducing costs and protecting core operations. Others are focusing on transformation, particularly in the digital arena.
How will businesses restructure?
In Europe, where countries have suffered some of the most significant and enduring economic setbacks from COVID-19, corporate restructuring is accelerating and is expected to be extremely defensive, especially over the next 12 months.
The report found that 60% of respondents expect to see increased divestments to create more cashflow for core operations. While divesting is most commonly used in the context of selling a non-core business unit. Divesting can create an injection of cash into the company, while also serving the company’s overall corporate strategy. Sometimes a divestiture is also referred to as an exit strategy.
58% of respondents see cost reduction as a key restructuring strategy, well ahead of other regions across the globe. During crises like Covid-19, the unprepared are quickly confronted with a plummeting top-line and struggle to adjust their cost model. Actions such as temporary freezes on new hires, renegotiation of key contracts with suppliers or customers, review or delay of CaPex investments, optimisation of inventory levels or cut of performance rewards are just a few measures that organizations can take to respond to the situation.
46% expect withdrawal from unprofitable businesses including both products/service ranges and customers. Customer divestment, whereby a company stops providing a product or service to an existing customer, was once considered an anomaly. However, it is becoming a viable strategic option for many organizations. Certainly, the skyrocketing costs of acquiring new customers and the complexities of cross-selling to different market segments continue to make customer retention imperative. But some firms are taking advantage of new segmentation approaches and technologies that have made it easier to focus on retaining the right customers—those who will bring in the most revenue over time—and, by extension, to show problem customers the door.
When are businesses starting the restructuring process?
A common mistake for business owners and CEOs is to wait too long to restructure, even through the signs of trouble are there. Delaying restructuring not only reduces the options available to your business but it can also raise the risk of business failure. By acting quickly, you might be able to avoid drastic actions and end up creating more impact and value from the restructure.
According to the report businesses are expected to be proactive about restructuring: 55 percent of respondents say organizations will begin these processes as soon as signs of stress emerge, rather than waiting for serious distress to arise (31%).
It should be noted that only 13 percent of respondents globally see restructuring beginning at a point
when the business is performing well — further evidence that such activity is currently weighted towards dealing with negative impacts rather than exploiting opportunities.
Business restructuring can be an essential process that helps your business evolve in response to a changing environment. It’s often a challenging, uncertain time, but with a plan aligned to your strategy, commitment to flexibility, and communication, you can give your business a chance at survival and return to profitability.
Knet Project’s team of experts specialise in corporate finance and M&A, turnaround and restructuring, and performance management advice for businesses of all sizes and in a wide range of industries. Read more about our services above or contact us today to find out how we can can help your business recover from a difficult situation before it’s too late.