Due to the occasion - Restructuring for beginners - Or Money never sleeps

LinkedIn is a business network, so I want to share some observations on how to restructure your business. Just some considerations to enable a structured conversation.

1. Situation

Imagine your company is in dire straits. We speak about a not insignificant player in your field of business (so not an SME where your actions are hardly noticed, but a world champion). While the foundations of your company and the legacy still have clout, your customers, investors, employees, and competitors do not take you seriously any more and test you wherever possible. I.e. your 'business model' doesn't seem to have a lot of future. At least not in the way you produce, sell/offer today.

As a newly appointed CEO who has been appointed due to seemingly having the backing of a (though thin) majority within the company's workforce, you start your first weeks into office. You consult with advisors and people who have helped you into office (probably mainly investors, but as well some supporters from within the company with vested interests).

2. Complication and Basic Strategies

You know already that you can rebuild a better company - which will take time, deteriorate your competitive situation short-term even more so, disappoint current parties with vested interests who have supported you, and probably changes the 'offering' of your company dramatically. This is the way of using the intact core capabilities and competitive advantages to rebuild. This will look like marginal changes short-term and probably leads to questions whether it can be successful as the way to this has never been walked before (by your very company). A high rewards, high risk strategy. This is a strategy of CREATION (of affordability if you have read my previous articles). If you win, you're a hero. If you lose, it will just have been you as you disappointed your supporters and everyone will say that it was clear that you will fail. Plus everyone will throw sticks between your legs.

Or you can deliver on the requirements of your supporters short- to mid-term by re-allocating economic benefits to you and them. It probably will lead to an ultimate failure of your company, but at least for a certain period of time (a couple of years) you are going to show a higher bottom line and likely even cash flows. Depending on your time preference (has got something to do with world view and age) a low risk and medium rewards strategy if your time in office is limited. This is a strategy of RE-ALLOCATION (reducing affordability if you have read my previous articles). And others need to clean up the mess thereafter. It's low risk as this has been done multiple times and everyone knows the playbook.

3. The Measures

Funnily, the two 'strategies' involve the same actions ultimately as a company is a company is a company. So it's hard for the amateurs to delineate.

Let's go through a little: The ultimate goal is to deliver higher bottom-line and cash flow to be able to distribute either to you (direct salary and bonus), employees (salaries), and owners (higher dividends, share buy-backs, or valuation in the stock market so that more people will buy and thus increase owners' wealth on paper and they can sell). How do you increase bottom-line and cash flow? Increase revenues and/or decrease costs. Done. You might think that debt restructuring or financial voodoo is contributing. Well, it's not really, it's just a re-allocation of payouts and ownership rights. It doesn't change your 'business model'. The only complication in all is what happens when and why. I'll just throw some bullets at you. This is a business network, I am certain you understand.

Increasing Revenues

Ultimate question: Current revenues (same products) or future revenues (new/adjusted offering)

• New products (future revenues): New investments will increase costs (an investment is a payout today in exchange for expected inflows in the future, so it's cash flow negative at the start) on a c.p. basis -> Increasing probably debt or equity.

• Existing products (current revenues): Reduce prices to increase volume (will need to be covered by lower costs thus long-term reduce quality of your product unless your market isn't saturated already - meaning the market is growing overall) or increase prices (only possible if you have a lever over your customers short-term - but it will lead to dramatic substitution effects long-term)

Decreasing costs

• Reduce personnel expenses: Pay less and/or reduce the number of people. Which both usually have an impact on the quality of your products (mostly negative if you have a good and well educated workforce but can have positive impact if the size created too much 'bureaucracy' or resulted in paralysis).

• Negotiate with suppliers: Pay less, stop buying. Same effect as above.

• Innovate throughput: Meaning increasing real productivity thus producing more 'units' with the same input. Or the same number of units with less input. But usually, this requires investments and time as it is rather in the category of 'new products'. It has a positive impact only after full implementation.

Debt/Ownership Restructurings/Re-Financing

I'll shortcut as I would go way too much into detail because of my background. Two basic categories here both directed at reducing immediate debt service to increase free cash flow short-term.

• Make lenders and/or equity holders forfeit parts of their receivables or payout requirements. Works usually if they think it's better to receive something than nothing at all. So you need to be willing to go all-in and credibly threaten with liquidation of the company.

• Reduce current payments or requirements for the promise of future payouts. You factually increase the duration of your liabilities or promises while increasing the notional amount. Gives room to maneuver now but limits it in the future (if you haven't been successful in growing revenues).

This is what every MBA Graduate learns. In countless case studies. So if you deal with people who have graduated from well-known business schools, expect them to follow this script more or less intuitively. They cannot tell you, and they usually pick only some of those measures based on their internal 'ideology', but that's how it works.

4. The Ultimate Pitfall: CONTEXT - And some more considerations

MBA case studies most of the time look at successful restructurings. But there are way more unsuccessful ones though they followed the same playbook. And while this works mathematically well, revenues up and costs down is not a strategy. It doesn't improve the competitive position of your company.

Some more considerations (non-exhaustive)

• What happens if your staff has nowhere to go? How do you execute? How will they react?

• What do you do if critical suppliers or partners decide to not work with you? Even if you think it hurts them more than you?

• If you go for the 're-allocation' strategy, what will your competitors do? If they are smart, they go for the 'creation' strategy. Short-term you win, long-term you are gone.

• How do you execute? While maintaining trust with your staff and suppliers and the market overall or purely transactional?

• How do you repair a non-functioning organisation if you overdo the 'disruptive' execution (in case you opted for it to have results quickly)? How much goodwill of the leaving members of staff and suppliers might be helpful for your future?

• If you overdo the cost cutting, your quality will deteriorate, and your customers will leave for competitors over time. Though you notice it only when it's too late.

5. Conclusion

In every restructuring lies drama. World champions have failed in this. Some have succeeded. But hardly ever multiple times. Better to NOT GET INTO A RESTRUCTURING POSITION. And restructuring people will make everything into a restructuring situation for the sake of wanting to be needed (like everything's a nail if you've got a hammer).

And if you go for restructuring, the HOW is more important than the WHAT. Because the what is pretty clear if you are open to realise the situation and are able to think straight.

Outlook and Remark

The next ones would be: 

• Is tearing down everything and completely rebuilding better?

• Restructuring with current owners or leveraged buy-out?

• How to make others pay?

• Negotiation on the edge

And no, remodelling your house is not the right analogy. As no one suffers from it. Contractors get more business, you get a better house, no one's fired, everything stays exactly as it is, etc. Win-Win. The analogy would be casting parts of your family out of your house to save cost of living (like education and health care) and using the money to then re-model it.