What is the difference between reorganization and restructuring?

Finance ManagementBanking & FinanceGrowth & Empowerment

In simple words, the word restructuring means any changes in a company. Generally the word restructuring in the corporate world is used in economic downturns. One should have a good understanding about the restructuring process before going for it.

Reorganization

It is a clause in company charter which provides guides to merger and acquisition, change in ownership at corporate level, change in assets. Generally, reorganization includes mergers, amalgamations, divestitures, corporate buyouts etc.

Usually, the companies go for reorganization to improve their efficiency, to increase their profits, reduce or eliminate financial troubles. Reorganization includes debt payments, restructuring company’s capital structure etc.

Some of the reasons for reorganization are as follows −

  • To focus more on core operations.
  • To generate cash inflows or to pay off their debts.

Restructuring

Restructuring is nothing but modifications in the company. Modification can be in operations, can be in managing their finances etc. management will think about restructuring when a company faces financial jeopardy.

The main aim is to reduce or eliminate financial trouble and improve company performances. Financial experts and legal teams will assist the company management in negotiations and in transactional deals.

In restructuring the company will look at debt financing, sale of some of company assets, operation reductions. Assets can be divesting by various methods like divestitures, equity carve-outs, spin-offs, split-offs, liquidation.

The reasons for restructuring are as follows −

  • If the company wants to change its existing strategy or wants to implement a new strategy.

  • If the existing units produce less profits due to poor performances and causes financial burden to the company.

  • If the individual units generate more profits than combined one. This concept is called reverse synergy.

  • By selling a company asset or unit, it generates cash inflows.

Differences

The major differences between reorganization and restructuring are as follows −

ReorganizationRestructuring
Stabilize the company facing bankruptcy.Make a company to reach market standards.
Taking control of a financially unstable firm.Reorganizing company structure to increase profits.
Change in management, ownership, legal and stocks.Reorganizing company ownership, operations and other structures.
Financial debt is minimized.Change in ownership, demerger, bankruptcy etc.
Restructures management, operations and financesHires financial and legal experts.
raja
Updated on 17-May-2022 13:31:57

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