Company Reorganization: Strategies for a Smooth Transition
By Indeed Editorial Team
Updated February 16, 2022 | Published February 8, 2021
Updated February 16, 2022
Published February 8, 2021
Company reorganization is a process used to increase efficiency and profits and it often involves altering the structure of departments and the number of employees. If you work in human resources or in a managerial capacity, it can benefit you to understand the reorganization process. In this article, we explain the different types of company reorganizations and offer a step-by-step guide for performing a smooth company reorganization.
What is company reorganization?
Company reorganization is the process of designing and implementing significant changes in the structure of an organization. Another name for this is corporate restructuring. Reorganization at the corporate level regularly includes altering budget plans, selling divisions, restructuring reporting officers and replacing managers. The IRS revenue code identifies seven types of corporate restructuring. Here are the seven types of company reorganization that you might see at work:
1. Mergers and consolidations
Mergers and consolidations join two companies. Specifically, a merger represents the combination of two or more companies through a contractual agreement. While consolidations happen when two companies or entities come together to form a new business.
2. Acquisition (target corporation subsidiary)
A subsidiary acquisition is also a type of merger. In this type of merger, a parent company uses its subsidiary company to acquire a specific organization. In Type B restructuring, the parent company does not merge with the company they are acquiring—rather, the merger happens between the subsidiary company and the acquisition.
3. Practical merger
Practical mergers are a form of reorganization that focuses on acquiring a company for liquidation. In this situation, a company acquires another company to get voting stock and other assets. The acquiring company then liquidates the voting stocks and distributes the assets.
4. Transfer spin-offs and split-offs
Type D reorganizations represent the split of one company or organization into two or more companies. Regular terms for this kind of division are spin-offs and split-offs. Type D restructuring also includes transferring assets—but it differs from Type C restructuring because it doesn't involve an outside company.
Recapitalization is a type of reconfiguration that targets the capital structure of a company. Unlike the other six kinds of restructuring—which change companies at an organizational level—Type E restructuring changes an organization's debt and equity. This process involves the exchange of one form of capital for another and aims to stabilize a company's financial situation.
6. Identity change
Type F reorganization is a change in the identity of a company or a change in where the company does business. This could be a name change, a significant change to a company charter or corporate relocation.
7. Transfer of assets
Type G is a type of reorganization that involves bankruptcy. A bankrupt company can transfer its assets to another organization. Doing this reduces the tax liability of the acquiring company regarding the assets they gain from reorganization.
Why do companies reorganize?
Company reorganization happens for a variety of reasons—these typically revolve around boosting financial standing and increasing efficiency. Here are seven reasons a company might choose to restructure its organization:
New financial goals: New financial goals can arise when companies merge or major change in management occurs. Reorganization is often necessary for situations like these.
New essential duty or task: Changes in technology or client-base can inform new essential duties or tasks. Restructuring might be necessary to accommodate those needs.
Launch of a new product: Launching a new product can open a company up to new markets or clients. It may also change the direction of sales goals. If the change is significant, it could result in the need for structural reorganization.
Gain efficiency: Sometimes companies hire consultants or task C-Suite members with improving overall efficiency. Reorganization is necessary if that initiative involves a major change in reporting, a split-off or a merger.
Change in company size: Change in company size could mean significant downsizing or acquiring another company. When this happens, reorganization is likely to occur.
Performance gaps: A performance gap is when there is a difference in the projected outcome and actual outcome in a department or personal goal. Performance can relate to sales, revenue or task completion. If these gaps are broad, a company may choose to restructure aspects of their organization.
External pressure: Government regulation, competition and consumer demand are all examples of external forces that can influence a company in making fundamental changes. If these changes require alternative reporting or relocation, then restructuring might be necessary.
Who is part of designing and implementing a reorganization?
Corporate finance officers, C-suite members, people in the legal department and outside consultants can all be a part of designing a company reorganization. After the design is complete, members of the human recourses and information technology departments work to implement the plans and initiatives. All other employees are responsible for performing according to the new standards and procedures.
How to perform a company reorganization
If you are a part of the design or implementation of a company reorganization, honest assessment and communication are the most crucial components of your success. Here are six steps for performing a smooth company reorganization:
1. Evaluate current strategy
To properly evaluate the current state of a company, you must take a look at the strategy, structure and business model in place. Determine strengths and weaknesses. Keep systems, programs and initiatives that produce desirable outcomes and replace or modify those that do not. This process can include collecting data, conducting research and consulting specialists.
Related: How To Calculate Productivity
2. Ask questions
Ask questions of your consumers, shareholders and employees. These people can likely help identify areas of concern and point things out that work well. You can gather this information informally, but there are benefits to conducting formal surveys or inquiries.
3. Communicate plans
Be open and honest when communicating your reorganization plans. Transparent communication shows respect and can offer your stakeholders perspective and security—it also can prevent rumors or speculation.
Outline your overall plans and goals, and create a role-based organizational chart to show changes in reporting. Share the outline and chart at a company-wide meeting and follow this meeting with smaller team meetings and reference material that is easy to access.
4. Prepare severance plans
If your restructuring involves layoffs, it is important to prepare severance plans in advance. Severance packages should be fair and in compliance with the law—and they should show respect for the work someone has done in their role. It is also wise to offer an employee buy-out. This is when select individuals have the chance to take a severance package voluntarily.
5. Implement the plan
Set dates to implement the various parts of your reorganization plan. Implementation can include an official merger or relocation. It can also include training employees in new roles or tasks and launching new programs or teams. Stick to the preset dates and make all stakeholders aware of when these changes will occur.
6. Assess and reflect
Assess and reflect by creating a special committee for this task. The committee should use the original goals and desired outcomes as a guideline for success. They should also conduct surveys and periodic data analysis to determine progress. Reflection is necessary to gauge how beneficial the reorganization changes are, and It can also determine if further action is needed.
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