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01. What does a restructure mean?

Restructuring in a business sense refers to reorganising the financial, debt, legal, ownership, operational, and/or other elements of a business in order to improve profitability. Additionally, you could restructure due to a transfer of ownership or buyout, to respond to a crisis, because of repositioning or change in the nature of business, or to respond to the risk of insolvency. The restructure can be in response to internal or external conditions or both.

For example, a debt restructure reorganises a business's liabilities, typically to help the company repay its debts. This type of restructure could involve consolidating debt and modifying the terms of the debt. Operational restructures could involve lay-offs and asset sales to cut costs.

Any type of restructuring could support a business in becoming more efficient, leaner, and more focused. The restructuring process is usually formal and involved, with financial, legal, or other qualified advisors such as TPH Advisory brought in to plan the process.

02. What does a turnaround mean?

When a business undergoes a turnaround, it shifts from performing poorly – and usually facing significant financial (or even survival) challenges – towards financial recovery and improved profitability. Like restructuring, turnarounds tend to be deliberate processes that include a plan: assessment of problems, review of strategy for improvement, and implementation. For example, it could involve raising new finance and overhauling the capital structure. And, like restructuring, the turnaround plan is often overseen by outside experts.

Turnarounds might be planned in response to challenges in processes, financial management, market conditions, and other factors that led to the initial decline of the business. They're typically short-term processes designed to enhance business performance for the longer term.

03. Why does a business need to restructure?

Business restructures can be implemented to address poor financial performance and profitability, by changing internal functions and operations to improve efficiency. However, they could, alternatively, be undertaken to facilitate growth or expansion into other products, services, or overseas markets. You might restructure your business to protect assets or to effect a change in ownership, like taking on new partners.

Other reasons to restructure include addressing high operating costs, high labour costs, poor productivity, and specific financial goals like cash flow health. Some businesses restructure to downsize and simplify operations. Organisations might also restructure as part of a proactive strategy in anticipation of changing consumer and market conditions, increased competition, or new technology and disruptive innovations.

04. What's the difference between a restructure and insolvency?

Insolvency means the business can't pay its debts when they fall due. Potential causes of business insolvency include poor cash management, excessive expenditure to support growth, lower than expected sales performance, and increased competition. Left unaddressed, insolvency can lead to insolvency proceedings and legal action like liquidation. Company directors have a duty to prevent insolvent trading, meaning businesses need to address the prospect of insolvency in a timely manner.

In contrast, a business restructure isn't specifically concerned with the inability to pay debts when they become due. Restructuring involves the reorganising of the business to enhance profitability, so it could help businesses who are at risk of becoming insolvent. The key difference is a restructure is a plan to improve an organisation's profitability, while insolvency describes a particular state the business is in: unable to pay its debts as they fall due.

05. What are the different types of restructuring?

The different types of restructuring can include:

  • business restructuring
  • legal ownership restructures
  • operational restructuring
  • cost restructuring, and
  • financial restructuring.

These can overlap.

Corporate restructuring is even broader, and it can include things like mergers, acquisitions, takeovers, demergers, spin-offs, split-offs, recapitalisation, and divestitures.

06. What is a business restructure?

A business restructure involves changing any element in an organisation. For example, you could undertake a legal ownership restructure, financial restructure, operations restructure, or another type of restructure. Restructures can include reducing the number of employees in your business.

The goal of a business restructure typically is to make the business more efficient, effective, organised, and profitable. Business restructuring is an involved process and organisations pursuing a restructure will usually have a detailed plan for the entire process.

07. What is an operational restructure?

Operational restructures focus on optimising the daily processes of a business to enhance efficiency, costs, and ultimately profits.

Operational restructures can be highly targeted to specific areas of the business. For example, you might address specific functions like sales, marketing, and customer service. In other cases, an operational restructure might be broader in its scope and could involve reorganising entire divisions and their operations.

08. What is a financial restructure?

A financial restructure reorganises the capital structure of the business, usually to address financial problems like excessive debt and high costs. In this case, the financial issues could be significant, constraining growth and profitability. Alternatively, they could be serious to the point of being detrimental to the viability of the organisation.

The capital restructuring could involve refinancing to reduce interest. It could mean having a portion of debt converted to equity, moving debt around, or assigning equity to new owners. An effective financial restructure should help with improving the company's bottom line.

09. When should I consider voluntary administration over a restructure?

Voluntary administration is an insolvency process for companies in significant financial trouble. It typically lasts around a month, during which the business gets a break from most creditor recovery actions. During this time, the company can - with the help of an external administrator who takes control of the company - decide on the best course of action, whether it's liquidation, implementing a Deed of Company Arrangement (DOCA), or giving control back to the company directors. This happens with the input of the creditors.

Voluntary administration can be the better option when the directors are at risk of trading insolvent or when you need a time-out to deal with significant creditor issues. It could be preferable to going directly to restructuring if executing a DOCA with outside experts could pave the way to a business restructure leading to the best outcome for creditors.

Ultimately voluntary administration can be a better option than restructuring if you need to hit pause and have some time to reassess the optimal strategy going forward. It might be the more appropriate option for businesses facing an emergency and in serious financial strife, with the directors at risk of insolvent trading.

10. Do I need a business plan for a restructure?

If you're restructuring your business, an updated business plan (in addition to your restructure plan) is ideal as it lays out how your business will proceed, under the proposed structure, to achieve your stated objectives. It gives you a detailed, methodical plan for how your restructure will support your business strategy and goals. These can include performance standards, financial goals, and debt reduction.

You might be targeting a specific breakeven or profit point, or restructuring in anticipation of new marketing conditions and opportunities. If you're restructuring for a sale, merger, or buyout, the business plan can also support your aims.

Any major deliberate organisational change like a restructure should ideally include diagnosis, planning, and implementation stages. A business plan can be used to address details like operational and strategic considerations. Restructures are complex schemes, and drawing up a clear business plan - and following it - could ensure you get it right.

In larger businesses, having a business plan can help you sell the change to everyone from customer service and IT teams to line managers, who can help reinforce the changes. Finally, since restructures tend to mean significant changes to your organisation, a new business plan is a good idea because your former business plan will likely be outdated and will no longer serve your needs when you commence your business restructure.

11. Do I need to apply for a new ABN when I restructure?

If your business restructure involves a change in business entity, you'll likely need to apply for a new ABN (Australian Business Number).

For example, if you're changing from a sole trader structure to an incorporated entity, you'll need to apply for a new ABN (as well as a new Australian Company Number or ACN). ABNs can't be transferred to other entities, so in this case you need to cancel your sole-trader ABN when you get your new ABN. The same applies to changes from partnership to a company or any other business-entity changes.

12. Do I need to update or find a new business name or trademark when I restructure?

If your restructuring involves changing your current registered trademarks or logos, you will need to update your trademark with IP Australia. If you need a new trademark, you'll also need to contact IP Australia to register it.

If your restructure involves a change of business entity, you might need to contact IP Australia to transfer ownership of the trademark to the new business entity.

You won't necessarily have to find a new business name when you're restructuring your business. However, if you're changing your business name as part of the process, then you need to cancel your old name and register a new one. You might also need to transfer your business name if you're changing legal entities as part of your restructure. This ensures your business name is associated with the new business entity and not with the former business entity.

13. Do I need to look over my tax obligations when I restructure?

It's a good idea to review your tax obligations and get advice from your tax advisors during the restructure process, as a business restructure could impact how much tax you pay as well as how you do your tax reporting.

This is especially true if you're changing your business-entity type, such as from sole trader to company, from partnership to company, or from company to trust. Check with your accountant or the experts at TPH Advisory to make sure you'll be fully compliant on tax reporting during and after the restructure.

14. What other terms are used to describe a business restructure?

Business restructures are known by a range of different terms, and some of these refer to different types of restructuring, though they can overlap at the same time. Terms like corporate restructuring, operational restructuring, organisational restructuring, and financial restructuring are variations of business restructuring. As an example, you can have a financial restructuring without impacting operational changes.

While they often overlap, these types of restructure focus on different elements in the business and they usually have slightly different goals even though the general aim is to improve the business and boost profitability.

15. What are the stages of a business turnaround?

So, what happens once you decide to turn around your business? A business turnaround could see your organisation going through the following stages.

(i) Assessment

Start with an assessment of your business so you can pinpoint how and why your business has struggled. Work out how much debt you owe and whether it's low margins, poor customer retention, mismanagement, or something else that's driving failure. You could end up with a short-term or preliminary action plan to address urgent issues like cash flow and excessive costs. With a realistic, clear appraisal, you can then proceed with a workable, effective plan for turning things around.

(ii) Emergency action

In cases of serious financial strife, your business turnaround could include an emergency action stage. This follows on from the preliminary plan in the assessment stage, and the emergency action is designed to help the business regain control, improve its cash flow situation, and raise cash if needed. You might need to collect accounts receivable, negotiate with suppliers, and realise unused assets. You could take advantage of opportunities to quickly boost revenue.

(iii) Implement turnaround plan

After you've assessed your business and taken necessary emergency action, you can move forward with your turnaround plan. You might need to rethink everything from your strategy, business model, and debt structure to your current employees and team, marketing, and operations. This should take place with the advice from turnaround experts, who can assist with designing a plan that puts the focus back on restoring viability as well as profitability.

(iv) Return to normal

Once implementation happens, your business ideally starts returning to normal. At this stage, the priority is to institutionalise the new changes so they're embedded in your daily operations as well as your strategic framework. At this stage, your business has resolved the crisis and is on the way to stability, growth, and profitability.

16. Can I restructure by keeping some companies in the group and liquidating others?

If you own a group of companies, you can usually choose to restructure by keeping some and liquidating others. For example, you could shut down several unprofitable, unviable subsidiaries, but keep the others that are growing and profitable. You might have a holding company as the ultimate owner of five or six separated registered companies although the whole group trades under the same business name. Generally you'll be able to opt to close down one or more of the five or six companies.

However, it's important to get advice from restructuring experts to make sure you do this type of restructuring in the optimal way and continue to meet your tax and other obligations.

17. What are safe harbour provisions?

In Australia, company directors have a duty to prevent their company trading while insolvent, and directors can be personally liable – and face civil and criminal penalties – for any debts incurred by the company when it's trading while insolvent.

The safe harbour provisions were introduced in 2017 and 2018 to encourage a restructuring culture, given the tough penalties for directors who engage in insolvent trading. With the safe harbour provision, it's possible directors might be less inclined to rush to start insolvency processes – and be more likely to explore potentially effective restructuring options for the business.

With the safe harbour provisions, directors will only be liable for debts incurred when the company was trading while insolvent if it's proven they weren't developing or pursuing a course of action that was reasonably likely to result in a better outcome for the company. Here, the better outcome in question is assessed against the likely result from going directly to administration or liquidation.

So what does this mean for directors? It means company directors likely have more leeway to stay in control and try to effect plans for improvement when a company is in financial strife even if there's the risk of insolvent trading.

Note safe harbour is available as a “defence” only if you properly provide for employee entitlements and seek advice from appropriately qualified restructuring advisors, in addition to other conditions.

When it comes to restructuring and turnaround, the safe harbour provisions could apply in the sense it gives the director more room to move in pursuing restructuring and/or turnaround (instead of going immediately into insolvency processes). Even if you're not pursuing restructuring or turnaround, raising the safe harbour provision (for trading while insolvent) could be an option if you’ve engaged in other types of business-improvement action "reasonably likely" to help the company.

The safe harbour provision are complex and they're a relatively new rule, so it's best to get advice from turnaround and insolvency advisors like TPH Advisory if you need to rely on this provision. At TPH Advisory, we're knowledgeable about how this new provision could be used and we can assist you with raising this provision. If it’s relevant to the situation, we seek to raise it to protect our company-director clients from personality liability if any associated restructuring and/or turnaround haven't had the intended impact on the business and the company has gone into liquidation.

In the course of providing restructuring and turnaround services, we're always mindful of the personal situation of company directors and other staff, and we'll act to protect your personal interests while assisting your business with the best possible course of action.