14 mai 2020

Time to restructure your business? A few hints from a corporate lawyer

When is the time to think about funding and restructuring?

Funding is not a brick, it is the cement that holds the bricks together. Frequently, when called to assist and advise a party to a funding transaction, whether on the side of shareholders or directors of a company or on the side of investors, there is a common misconception that we employ ourselves to evacuate: the business is not about funding, it is about getting clients and cashflow and streamlined innovation and new products, and so on. In other words, since funding will not raise a house without the bricks and a good construction plan, we would generally say to our clients, « let’s walk through the house before inviting investors in, and make sure they feel comfortable when sitting in your kitchen ».

Despite some kind of a holistic approach is obviously necessary when looking to gain funding, we generally suggest our clients to at least make sure that their business has a purpose, a plan, a route to implement the plan, one or more contingency plan, a leader, and a board with communication skills. Then, they might get funding on board.

Having clearly identified the purpose of the business to avoid confusion between goals and processes is essential, e.g. are we selling innovation or selling a product that requires innovation? From an investor’s standpoint funding is for a purpose, generally not just to run the business. Also, purposes can be challenged usefully when they are first clearly defined.

Planning is essential and so is the route to reach the various stages of business development. This said, having contingency options and alternative routes are all the more essential. Plans are generally drawn to lead to success and routes are often designed as smooth and short. In reality, roads are bumpy and plans misleading. As a result we would insist on showing the business and its management team’s agility to contend with the unexpected and drive opportunities from problems. This begins when fighting the deal through and what better opportunity than negotiating a deal for developing agility skills -so start early.

This brings us to leadership and communication. Clearly, many of the deals that never saw the light are deals where leadership was not clearly defined and communication poor. Having an idea, a plan to make it live and a route to progress towards it is not enough without someone steering the course and having unlimited access to whether predictions. Behind the metaphor, we believe that businesses should look for qualified independent leadership and that the flow of information should be carefully designed, not only to ensure that the CEO gains access to data but also to make sure that investors are not left in the dark.

Independent leadership is probably the keystone here. It is always important to remember in this respect that a business once incorporated is an independent entity by itself: independent from its shareholders, independent from its management and independent from its investors. So should be the CEO as he will vouch for all.

A simple way to look at it is to admit restructuring is an option when it derives profits

Restructuring is always an option when business development is a necessity. The rationale for restructuring is, however, likely to differ between the CEO, the CFO, the tax attorney, the brand manager, the human resources manager, etc. For each, it will carry a possibly slightly different goal or requirement, all of which certainly making sense. Now there are cost associated and one way to look at it would be to simply admit that restructuring is an option when it derives profits.

Among the « boxes » a business should tick prior to gaining funding should be the redesign of the business to ensure that the funding may be directed at what it is meant to finance. At some point, investors will prefer to spend part of the money to restructure a business than risking a loose end.

Once it is agreed that a corporation is an organization conceived to create added value and profits and certainly one of the most reliable tools in this respect, restructuring should be envisaged as a permanent and necessary process to maintain the efficiency and the performance of the business itself, and management teams should be at the lookout to seek improvements derived from restructuring.  A company needs to adapt quickly to new forms of business, to international development, to different market needs, and as such business development and restructuring have to be viewed as closely connected.

Contrary to a widespread perception, restructuring may be run in a smooth and efficient way, sometimes even as a background upgrading process from company version 2.0 to version 2.6.

Our clients increase their competitiveness and develop market and business agility through a close-working relationship with our Firm that enables us to review regularly potential restructuring options and keep tabs on legislation changes and opportunities.

Working in an international environment, as many of our clients do, makes this capacity to adjust at all time and adapt to global and local changes an essential part of the way they build their sustainability and profitability over their competitors.

What about trademarks and the company name?

Restructuring may have many purposes, sometimes it’s also time for a clean slate and a new name. In most cases, however, restructuring will be without impact on a company’s trade registry identification, its name or commercial brands. When the restructuring implies to set up one or more divisions incorporated as different companies, or requires to merge two or more companies, then, of course, since new entities are set up or former ones winded up, business numbers may change and trademarks may be transferred from one entity to another, or simply change.

When it comes to trademarks, restructuring will often be an opportunity to rethink the ownership and the royalties flow for trademarks and patents. At some point it might make sense for example to regroup the trademarks and patents to a dedicated holding and redesign an efficient licensing organization. Also, a particular care should be given to intellectual property rights when restructuring, notably to avoid separating unwillingly a business from its brand. In any event, restructuring is often a perfect occasion to think branding, trademarks, patents and IP management. And when you think about the efforts to raise funding or go through restructuring, it is clearly worth the time discussing whether or not to revamp the brand.

Should we restructure to develop internationally ?

Travel light, travel smart, a likely motto for business developers expanding a business abroad.

As a Swiss and French law firm, many of our clients have initially contacted us when looking forward to acquire or set up a business abroad to expand their activities. Almost on every occasion it also becomes obvious that there was simultaneously a need to restructure the way they had initially set up their operations, their accounting and tax, their assets, their IP, etc. Growth calls for restructuring, but so does international competition.

When restructuring as part of their international expansion, groups need to be particularly careful with their tax organization, export procedures, VAT management, and employment costs -especially when seconding employees.

This is an area where the advice of knowledgeable corporate lawyers will become invaluable. One will easily understand that options chosen hastily or based on ill-advised plans will become extremely difficult to adjust at a later stage -especially in an international environment, dealing with multiple jurisdictions.

As a result, we strongly advise our clients to plan in detail international restructuring before going ahead. Such decisions require to be benchmarked against a seasoned professional’s review.

Taking care of the team and boosting motivation Take care of the sailors after the storm. This could be a human resource saying upon completing a business restructuring. Restructuring takes its toll on the people and legitimacy issues arise along with the resistance to change. In addition, mergers for example also lead to redundancy issues that aggravate with the lack of time to deal with such issues after the deal is completed. We generally tell our clients that they should focus on building the legitimacy of their managers throughout the deal, on providing to all individuals within the business a chance to be part of the change instead of becoming sitting ducks in a hunt for novelty, and on careful human resources modelling to avoid as much as possible post-restructuring redundancies.

Last but not least, a general suggestion prior to merging or restructuring

Pick a strong team of close-working individuals to set up the management team having in mind that merging or restructuring also means building with a change of mentality.

Retain investors or partners who understand business agility and who will support your company when it will contend with the unexpected.

Expect Murphy’s law’s events to rise exponentially with the change and develop « what if » scenarios with the advice of your corporate lawyer.

Ludovic Doutreleau

Partner | Geneva office

WAN Avocats is a French and Swiss group of corporate, tax and employment lawyers. We advise shareholders, investors and board members across the span of the evolution of their businesses. Our legal services cover daily general assistance or specific missions related to an upcoming operation or transaction. This article was interesting in light of your needs? Please feel free to contact us to discuss and assess how we may assist you.