Different Types of Corporate Restructuring

Corporate restructuring is a process by which companies evolve by changing their structure. It is used to reorganize, improve competitiveness, or because of internal and external pressures. In this guide we will discuss the main kinds of restructuring—describing them in detail—and how international firms and high-net-worth entrepreneurs can adopt them. 

What Are the Types of Corporate Restructuring?

Corporate restructuring involves significant changes within the company. But, what are the types of corporate restructuring? There can be different ones, but essentially reorganizations occur at each level. 

• Legal: Creation of different entities, changes in structure, etc.
• Financial: Debt reorganization, capital increases, asset disposals.
• Operational: Dismantling no longer profitable divisions, outsourcing non-core functions, streamlining operational processes.
• Organizational: Changes in hierarchy or leadership, governance, etc.

Each typology suits different situations and scenarios. Ascot International and its operational restructuring guidance can help you make the right choice based on your objectives and economic situation. 

Financial Restructuring

Different types of corporate restructuring include financial ones. It consists of changing the economic structure to improve stability through a better debt-to-equity ratio. It is pursued by: 

• Debt rescheduling: It consists of extending maturities or changing interest rates. 
• Issuance of new equity: Raising capital through the entry of new partners or shareholders.
• Debt-to-equity conversion: A process that converts debt to equity by lightning the balance sheet and improving the financial balance. 

This enables the company to provide itself with better liquidity in the short term, avoid insolvency and make itself more attractive in the market. 

Operational Restructuring

Operational restructuring targets internal efficiency by modifying how a business functions from day to day. It is often adopted when the organizational structure has become too costly or inefficient and consists of waste reduction, productivity improvement, and workflow optimization. Key examples include:

• Downsizing or eliminating redundant roles or departments.
• Outsourcing non-core activities such as IT or customer support.
• Realigning the supply chain to reduce costs or improve responsiveness.
• Reengineering business processes to streamline operations.

Organizational Restructuring

Organizational restructuring deals with changing the company’s internal structure—department structure, roles, and lines of command. It is used in several cases: 

• Hierarchical flattening by reducing hierarchical levels aimed at improving communication;
• Merging or splitting departments to avoid redundancies and optimize resources;
• Consolidation or redistribution of roles to balance work and skills consistent with objectives.

Among the types of corporate restructuring, the organizational one aims to streamline the structure, improve its efficiency and communication. 

Legal Restructuring

Legal restructuring involves making changes to the company’s legal structure to simplify governance, protect assets, and ensure regulatory compliance. The most common scenarios are: 

• Forming subsidiaries or holding companies to manage multiple lines of business and limit liability;
• Changing jurisdiction or legal form, such as moving from an LLC to a corporation; 
• Dissolution of unused legal entities to simplify the structure and reduce costs.

Most often, legal reorganization is part of the types of corporate restructuring used in expansions or consolidation. 

Mergers and Acquisitions (M&A)

Mergers and acquisitions involve entities outside of the company. They are processes by which one company merges with or acquires another. Among the main kinds are:

• Horizontal merger: occurs between firms in the same industry and is aimed at consolidating the market and increasing share.
• Vertical merger: Typical to improve supply chain control. In fact, it occurs between enterprises at different stages of the same supply chain. 
• Conglomerate merger: In this case it occurs between firms operating in different sectors to diversify the business.

Related to M&A are joint ventures—typically to expand into additional markets with local partners—and reverse mergers—the acquisition of a public company by a private one to go public without an IPO. 

Divestitures and Spin-Offs

Divestitures and spin-offs are often used when a company wants to simplify its operations or sharpen its focus. A divestiture usually means selling, closing, or phasing out a part of the business that no longer fits the company’s direction. In contrast, a spin-off turns a specific division into an entirely new and independent entity, typically with its own leadership and goals. These steps can help a company reduce complexity, employ fewer resources, and concentrate on what’s working most effectively—a product line, market, or business model. 

Turnaround Restructuring

Turnaround restructuring is used by societies in crisis or with declining performance. Sometimes it is essential to ensure business continuity by quickly returning to profitability and stability. Typical measures taken include:

• Crisis management: Urgent interventions aimed at containing losses and surviving;
• Renegotiation with creditors: Agreements and renegotiations with suppliers and financial institutions to avoid default;
• Closure of unprofitable units: Cutting investment in loss-making divisions;
• Change in leadership: Replacement of leaders by experienced crisis management figures. 

The process is based on quick decisions to stabilize liquidity, reduce losses, and restore stakeholder confidence. 

Strategic Restructuring

This type of rearrangement involves long-term planning and repositioning. In fact, it aims to reposition the company in the market to take advantage of opportunities and changes in the target industry. Some examples are: 

1. Entry into different geographical or sectoral markets through partnerships, investments or acquisitions;
2. Changes in product/service lines that replace previous ones;
3. Reallocation of capital or human resources to reposition against competitors.

It is often an integrated process with other types of corporate restructuring strategies as it requires an overall corporate vision. 

Choosing the Right Restructuring Strategy 

Selecting the most suitable consolidation approach depends on several variables. Business size, financial health, market trends, and regulatory conditions greatly influence decisions. A company facing liquidity issues may need financial restructuring, while one preparing for expansion may benefit from an organizational or legal one.

In most cases, firms combine multiple kinds to address complex needs. Consulting, legal, financial, and operational experts is essential to assessing risks and maintaining adherence. 

FAQ

What are the different types of corporate restructuring?

There are many varieties depending on the purpose. The main ones are financial, operational, legal, organizational, and managerial. 

When is corporate restructuring needed? 

There are many situations in which it may prove necessary. For example, during a crisis or decline, when entering different markets, or to cope with difficulties and opportunities external to the company.

What is the difference between restructuring and reorganization?

Restructuring involves the entire organization. It implies broad changes (structural, organizational, operational, legal, financial, etc.), while a corporate reorganization stops at the operational and managerial aspects.

Is corporate restructuring always about cost-cutting?

Absolutely not. It can support the growth and expansion phases, adapt the company’s structure to changing regulations or even prepare it for future mergers or acquisitions. 

Can a company use more than one type of restructuring at once?

Yes, most are integrated to achieve better outcomes. Often, in order to be successful, the restructuring must cover more than one area within the company. 

References

Financial Edge Training. (n.d.). Different Types of Corporate Restructuring. Retrieved from https://www.fe.training/free-resources/restructuring/different-types-of-corporate-restructuring/

Vance, D. (2010). Corporate Restructuring: From Cause Analysis to Execution. Springer. ​

DePamphilis, D. M. (2010). Mergers, Acquisitions, and Corporate Restructurings (5th ed.). Wiley.​

Coates, J. C. (2015). Mergers, Acquisitions, and Restructuring: Types, Regulation, and the Role of Corporate Law. In J. N. Gordon & W. Ringe (Eds.), The Oxford Handbook of Corporate Law and Governance (pp. 570–602). Oxford University Press. ​