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Business restructuring – why, when and how?
16 December 2021 | Minutes to read: 5

Business restructuring – why, when and how?

By Todd Want and Cameron Martin

This is the first article in a two-part series on business restructuring and explores the why, when and how. Our second will support the first with practical examples.

As a CFO or finance leader, you play an important role in ensuring that the structure of the business is appropriate, tax-effective and fit-for-purpose. This can involve warming up the CEO, Board and/or any other key decision-makers well in advance of when you think a restructure might be needed. Here, we consider when and why a restructure might be required and how to determine which will be the most effective structure for your business at any given stage in its lifecycle.

When and why a restructure?

Maybe your business is beginning to outgrow its current structure or perhaps the goalposts have moved. While in some instances it’s obvious that a restructure is needed, in others it’s not, which is why it’s important to review your structure regularly.

Often, by asking these four key questions you can get an indication of whether a restructure may be needed:

  • Is the tax on operating profits being minimised?
  • Can tax outcomes on a sale be appropriately managed?
  • Does the structure provide sufficient asset protection?
  • Will growth, succession or exit planning be efficient and effective under this structure?

If the answer is no to any or all of these questions, or there are other specific factors that you feel are holding your business back, it could be time to restructure.  But what type of structure is best for each stage of the business lifecycle, and is there a one size fits all approach?

Stages of the business lifecycle

Moving through the different stages of your business lifecycle could warrant various restructures taking place.

The key concerns of a startup will generally be quite different from those of a company in its growth phase. Likewise, what’s important to a business undergoing considerable expansion will differ from that of a business planning a sale or succession. Your business structure must be fit-for-purpose and effective at all times, which is why some businesses will change structures several times.

Below are the common stages of a business lifecycle, and some key considerations that will generally be important to factor into structuring decisions at each stage.

Startup: Startups generally require a structure that enables them to raise funds and operate most cost-effectively.

Growth: Businesses in their growth phase are generally focused on driving cashflow and raising money through equity or debt. The structure of a business in its growth phase must be easy to understand. If it isn’t, potential shareholders are less likely to invest. Attracting staff is also important, which is why you might consider a structure that allows for an employee share plan. You should also consider a structure that enables access to government incentives such as the Research and Development Tax Incentive.

Expansion: Once it’s progressed from its initial growth phase, a business will need a structure that supports further growth, including moving into new markets and expanding interstate or even globally.

Corporatisation: Here, a business will require a heightened level of asset protection. While this is integral at all stages, when you’re at the point of corporatising you’re likely to have more assets at risk that need protection.

Sale/succession: Your key concerns when planning for a sale or succession will be how to attract a buyer and what your structure will need to look like to do this. Once again, being easily understood will be key, given your potential buyers will need to understand the findings of their due diligence.

What’s the right structure?

There is no one size fits all structure and it’s important to consider your business and its unique characteristics to determine your best option. What is ideal will vary from business to business and is based on the specifics and objectives of the business and its owners.

Ideally, to determine what’s best for a client, we start with a ‘clean sheet of paper’ and design a purpose-built structure based on their unique circumstances. In designing the structure, you will weigh up many criteria, but the key items can often be grouped into the following four areas:

  • Tax on operating profits: Is the structure lending itself to appropriately and efficiently minimising taxes on profits?
  • Tax on sale: Is the structure appropriate to manage the tax outcomes that might arise if the business or entity is sold?
  • Asset protection: Does the structure allow protection in an appropriate manner from risk? Risk can come in many ways, shapes and forms including risk within the business, risk from outside the business and family risks such as relationship breakdowns.
  • Succesion/Exit planning: This doesn’t just relate to the question of whether you’re going to sell, but how. Are you going to bring management as in shareholders? Are you going to have family members in the business? Does the structure lend itself to that? Does it lend itself to exit, and what does that exit look like? Is it a straight sale of the entirety of the structure? Or is it something that might be staged over time and require a structure that can work flexibly over time and ensure optimum tax outcomes?

Other factors to consider include:

  • Legal and regulatory
  • Costs of operating the structure
  • Is your structure understandable and workable?
  • Can the structure be ‘bolted onto’ in the future?
  • Is it suitable for obtaining debt funding?

How to restructure

Once you’ve built your ideal structure, compare it with your current structure. Are the two the same? If not, a restructure may be necessary.

Depending on the size of your business and the different structures you’re moving between, the restructure process could be simple, or it could be complex and need to occur over several stages.  Importantly, no matter how simple or complex the restructure is likely to be, a detailed plan working out how to transition from one to the other is crucial.

Some considerations here are the number of stakeholders impacted by your proposed restructure, including lenders and suppliers you’ll need to inform, contracts you might have with merchant payment facilities, landlords you’ll need to negotiate with and legal documents such as disclosures and licences that you’ll need to update and renew.

Whatever the case, as the CFO, you’ll need to be heavily involved in developing the detailed plan, leading the execution of that plan and managing the many parties involved. This includes ensuring that key parties – such as the CEO and Board – understand their role in the restructure as well as the benefits, risks and challenges involved.

To recap

To summarise, there is no one size fits all structure and what’s ideal for your business could be very different to a similar business in the same industry. To determine the most effective structure, start by designing a purpose-built structure and weigh up the importance of key criteria including tax on operating profits, tax on sale, asset protection and ability to support a succession or sale, landing on a structure that’s most appropriate and effective for your business and its objectives. This will largely depend on the stage your business is at.

You may lead the business through many restructures as it evolves, with the key concerns of a startup being very different from those of a business in its growth phase, expansion, or planning for a sale or succession. The restructuring process might involve a few simple tweaks here and there, or may be more complex. In any instance, developing a detailed plan, leading its execution, and managing the key parties involved will be crucial at every step of the journey.

Now you’re across why, when and how to restructure, our next article in the series will use practical examples to demonstrate the different types of restructure available and provide more detail on how to execute your restructure.

For more information on business restructuring, contact your local William Buck advisor.

Business restructuring – why, when and how?

Todd Want

Todd is a Director in our Tax Services division and National Councillor and Director at The Tax Institute. Todd’s expertise lies in small-to-medium sized enterprise taxation matters. He advises clients on a broad range of tax issues such as capital gains tax, advice relating to structuring and restructuring, the tax consequences of acquisitions and divestments, small business CGT concessions, Division 7A, taxation of trusts, international tax issues and tax risk management.

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Business restructuring – why, when and how?

Cameron Martin

Cameron is a Director in our Business Advisory division with over 20 years' experience working with private businesses, individuals, start-ups, family groups and subsidiaries of multinationals. Supporting clients from a breadth of industries, Cameron's expertise lies in accounting, tax advice, financial and tax compliance, audit, SMSF, structuring advice, cloud accounting support, succession and estate planning and virtual CFO services.

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