While corporate restructuring takes many forms and each situation is unique, similarities can often be seen.

Larger companies may do a financial or “balance sheet” restructure where debt is converted into equity. These are usually accompanied by a thorough review of the organizational chart, reassignment of supervisory responsibilities, and layoffs of less productive employees. Frequently, a key executive of an unprofitable division is also included in the layoffs, or the unit is sold or closed.

In some cases, a Chapter 11 bankruptcy filing is necessary. Often confused with the filing that permanently closes a company, Chapter 11 is, in fact, for businesses that want to continue operation. Airlines seem to go through this process repeatedly, only to emerge restored and ready to continue operations. Many, if not most, companies can emerge from a Chapter 11 filing and go on to thrive after the restructuring.

Smaller companies more often face an operational restructure, as opposed to the aforementioned financial restructures. In other words, the conditions that led to the losses must be corrected before the financings can be restructured. In this case, Chapter 11 filings are discouraged, since company owners have usually personally guaranteed the debt.

Those charged with restructuring small and medium-sized companies usually start by examining variable expenses, since a reduction in employee salaries and expenses is usually the quickest way to reach a cash flow break-even level. While difficult emotionally, since the affected co-workers are often friends or family, the firm’s survival takes precedence.

An example that comes to mind is of a medium-sized company that was losing money, with even gross margin a negative. The chief restructuring officer found the largest account was priced below direct cost, which accounted for most of the negative gross margin. After repricing at market, the customer left and most of the staff that had been assigned to this account were laid off, but the cash losses were immediately halted.

The next step was to examine productivity by employee, where it was found that most of the staff’s output was below industry averages and rework (errors) was at 30%, which is very high. Not surprisingly, clients were complaining that work ran two or three months late.

To overcome these issues, a productivity monitoring system that rewarded higher output and penalized errors was employed. Within months, productivity increased by 30% and  rework dropped to 3%, enabling the company to deliver on time. Employees who remained unproductive or caused excessive errors were laid off. Remaining productive and accurate employees saw their compensation rise under the new system.

One unprofitable division was then closed and a second that was marginal was sold. Cash flow losses stopped within two months and the company returned to profitability six months later. The company restored its reputation, resumed hiring, and was able to bring back customers who had left. That includes the previous largest account, who now pays market price and is a profit center for the company.

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