In the challenging world of commerce, financial difficulties are an inevitable reality for many companies. Whether driven by economic downturns, rising costs, or market disruptions, these pressures can place a strain on even the most resilient businesses. Restructuring can offer a practical solution to regain control, stabilise operations, and pave the way for long-term recovery. But knowing when and how to act is crucial.

This short guide focuses on Scottish business and provides a comprehensive overview of corporate restructuring in Scotland, helping business owners identify the right time to intervene and the steps to take for a successful restructuring process.

What is corporate restructuring?

Corporate restructuring refers to the process of reorganising a company’s operations, finances, or structure to improve efficiency, address financial difficulties, and ensure long-term sustainability. Restructuring is often used as a proactive measure that can transform a struggling business into a thriving one.

Key forms of restructuring include:

• Operational restructuring: Improving efficiency by reducing costs, optimising processes, or realigning resources.
• Financial restructuring: Renegotiating debt, improving cash flow, or securing new financing.
• Organisational restructuring: Adjusting management structures, streamlining teams, or merging divisions.

When should you consider restructuring?

Timing is critical and acting too late can limit your options and lead to more severe outcomes, such as insolvency. Below are some common signs that restructuring may be needed:

1. Cash flow problems – persistent cash flow issues are often the first indicator of more severe financial issues. If this is happening regularly, and you are struggling to pay suppliers, staff, or creditors on time, it’s time to take action.
2. Declining revenue – a sustained decline in sales or revenue, particularly if it’s outpacing cost-cutting efforts, suggests the need for operational or market realignment.
3. Rising debt levels – mounting debt or difficulty meeting loan repayments each month can signal a need for financial restructuring, such as renegotiating terms or consolidating debt.
4. High employee turnover – organisational inefficiencies, an increasingly fraught culture, or other internal challenges often manifest in employee dissatisfaction and high turnover rates.
5. Market changes – industry shifts, new competition, or regulatory changes may require a revaluation of your business model.

Common myths about restructuring

Many business owners delay restructuring due to misconceptions which we would like to address:

1. ‘Restructuring equals failure’

Restructuring is a strategic tool, not an admission of defeat. Many successful companies use restructuring to overcome challenges and thrive.

2. ‘It’s only for large businesses’

Restructuring is relevant to businesses of all sizes, including small and medium-sized enterprises (SMEs).

3. ‘It’s too expensive and we don’t have the time’

While restructuring does require investment, the cost of inaction can be far greater. Once they understand your position, professional advisors can help to get a plan in place for the restructuring as well as help to implement the plan, streamline the process and maximise outcomes.

How to approach restructuring

Restructuring can be a complex process which requires careful planning to ensure a smooth execution.

1. Recognise the need for change – the earlier you identify problems, the better. After fire fighting for a length of time, acknowledging the issues is a significant step to committing to addressing them.

2. Engage external specialists – consulting with restructuring professionals will provide you with a fresh pair of eyes to review the business and expert knowledge of how to deal with complexities. They will provide tailored advice to your exact position, and guide you through legal and financial complexities in the right order.

3. Consider an Independent Business Review (IBR) first – engage an advisor to assess the financial health or operational capabilities of your business. You will gain a detailed analysis of your business which can help any business to feel comfortable with next step decisions for restructuring. An IBR report will cover:

• Company and business position overview
• Funding structure
• Current trading
• Historic trading
• Financial position and short-term cash position
• Financial forecasting and projections

This review will also identify the root causes of distress and help determine the best course of action.

4. Develop a restructuring plan – based on the review, an advisor can help to build out:

• Key objectives (e.g., cost reduction, debt renegotiation)
• Specific actions and priorities to achieve those objectives (to address immediate plans as well as long-term sustainability)
• A realistic timeline
• Metrics to measure success

5. Throughout this process, engage with all stakeholders – effective communication is crucial for plans to work. It is worth taking time to regularly keep stakeholders – including employees, creditors, and investors – informed about plans for the business and as progress is being made. This transparency builds trust and encourages cooperation.

6. Navigate change – execute the restructuring plan with structure. It can involve:

• Downsizing or reorganising teams
• Negotiating with creditors for better repayment terms
• Seeking new investment or financing
• Streamlining operations to improve efficiency

7. Maintain business health – as restructuring is not a one-time fix, regularly reviewing progress against your objectives is key to avoiding challenges in the future or being able to address them even earlier.

Legal framework for restructuring and insolvency in Scotland

In Scotland, restructuring and insolvency processes are governed by UK-wide legislation, such as the Insolvency Act 1986 and the Corporate Insolvency and Governance Act 2020. The main processes available to help a Scottish business facing challenges include:

• Company Voluntary Arrangement (CVA): An agreement between a company and its creditors to repay debts over time while continuing operations.
• Administration: A formal insolvency procedure where an administrator takes control to restructure the business or achieve a better outcome for creditors.
• Pre-Pack Administration: A sale of the company’s assets arranged before entering administration, allowing the business to continue trading under new ownership.

The best process for a business will depend on it’s situation and all options can be discussed with a professional to identify the best way forward for the business. Engaging an insolvency practitioner for a review means that the business will be evaluated by an advisor that fully understands and has vast experience in supporting businesses out of challenges. It does not mean that you are engaging a professional that is just going to close down the business. It is essential to navigate these processes and ensure compliance with legal requirements.

Restructuring is a powerful tool for Scottish business owners

By acting decisively and engaging professional support when facing financial or operational challenges, business owners will have more options to navigate difficult times, protect the business, and build a strong foundation for future success.

This guide was written by George Dale, Partner at the Edinburgh office. If you would like to discuss any aspect of this restructuring guide with George, he can be contacted on 0131 322 8417 or emailed at george.dale@opusllp.com.