In a constantly changing business environment, every company will face a moment where they must consider restructuring their existing systems.
Unfortunately, many businesses fail to recognize when it’s time to restructure their company. Good leaders recognize when it’s time for change and take proactive steps to ensure the appropriate transformation takes place. Let’s go through the 8 most important signs it’s time to restructure your business.
What Is Restructuring?
Restructuring is any action taken to significantly change a company’s financial or operational structure. Some examples of restructuring include:
- Change in internal operations processes
- Restructuring of debt
- Change of positioning in the marketplace
- Modifications of operations to become a more profitable business
Companies undergo restructuring for several different reasons. In many cases, it is due to financial difficulties.
Signs It’s Time To Restructure
Knowing when to restructure your business can save you from a worst-case scenario — a liquidation event. Let’s take a look at some of the telltale signs that it’s time to consider the restructuring of a company:
1. Profit Growth Has Stalled
You should have dashboards and financial reports in place that help you track important trends in your business. If your business had growing or consistent profit margins that then trended downward for an extended period of time, there’s likely a problem.
This is a sign you need to review operational expenses and other important metrics and take corrective actions quickly. If trends are still negative after your corrective action, you may consider a broader restructuring of your business.
2. Inefficiencies Are Everywhere
When a business becomes inefficient, it has likely outgrown the processes that used to work. Inefficient companies tend to need to hire in direct proportions to any growth in business — more customers equals more staff. Efficient companies however can grow, adding more business without needing to hire a proportional amount of staff.
Sometimes, inefficiencies can be improved with simple changes like improving systems or adding software to streamline operations. Other times, a broader restructuring of the organization is needed to begin operating efficiently.
3. Your Company Is Over-Leveraged
For the past decade, the cost of borrowing has been low. Excess liquidity and low-interest rates have encouraged companies to take on increasing levels of debt.
Debt is not an issue when it’s managed properly and your balance sheet can support it. However, the ease of acquiring debt has led to many companies overburdening themselves with too much debt, causing them to be over-leveraged.
The threshold for too much debt will vary depending on your business. If you have too much debt you want to consider restructuring your company. If you are unable to pay the debt your business will likely have a legal reorganization through a bankruptcy process.
4. High Turnover
Employee and client turnover each need to be closely monitored. If your customers start leaving in high-levels it likely means they are no longer satisfied with what you offer and are looking to find alternatives.
Likewise, if your business begins to look like a revolving door with employees coming and going, there’s an issue that needs to be resolved. It could be better compensation from competitors, morale issues, or necessary cultural changes that management hasn’t addressed. Look for a pattern and try to find the underlying causes. It’s important to handle any issues quickly. If your business is unable to maintain a stable staff it may need to undergo a broader restructuring.
5. Shifting Regulatory Environment
Government continues to grow. Every year there are more regulations affecting how businesses can operate. If you’re in a market with new regulations you may be forced to change the way your business operates. You could find yourself restructuring your business to adapt to the new regulations or you could restructure your business to creatively (and lawfully) get away from the restrictions of that regulated environment.
6. Frequent Mistakes
The presence of constant mistakes is the result of poor communication, misalignment, and a lack of management. This is everyone’s responsibility, not just those making the mistakes. When people work in systems that no longer work, are poorly managed, and feel overworked, mistakes are unavoidable. This is a sign you need to take a close look at your business to see if any thorough changes are needed.
7. Shifting Markets
If your business is in a market that is disappearing or rapidly shrinking, you need to take decisive action to restructure your business. A permanent change in the market can put you out of business in a hurry if you are not prepared.
For instance, consider Blockbuster. The once-juggernaut of media rental wasn’t equipped to handle the shift from physical movie rentals to mail-delivery and streaming and ended up losing a substantial amount of its business to Netflix and Redbox as a result within just a few years. Blockbuster was either unwilling or unable to adapt to the changing market and the demands of its customers, and stayed entrenched in its traditional business model until its untimely end (save for a too-late foray into by-mail disc delivery that couldn’t compete with Netflix’s established lead).
In this case, the brand’s inability to see the writing on the wall and pivot in a timely manner ultimately spelled its doom. Keep your eyes on your customer base, spot developing trends so you can make any necessary adjustments, and use market research and trendwatching to your fiscal advantage.
8. Low Morale
Employee morale can be negatively affected by a myriad of issues. Common problems include poor management, toxic team members, and a lack of response to constructive feedback.
It’s common for team members to voice their concern for needed changes well before management realizes the need for drastic change. It’s important for management to actively listen to team members’ concerns. Doing so can prevent the spread of deeper, more pervasive issues.
Find The Right Structure For Your Business
If you’re in need of a restructuring advisor, Lloyd and Hodge are here for you. We can help you determine the most advantageous entity structure for your business and put you in a position for long-term success.
Contact us today to learn more about our Entity Selection & Restructuring services.