Restructuring Meaning

Restructuring is defined as actions taken by an organization when facing difficulties due to wrong management decisions or changes in demographic conditions and therefore tries to align its business with the current profitable trend by a) restructuring its finances by debt issuance/closures, issuance of new equities, selling assets or b) organizational restructuring which includes shifting locations, layoffs, etc.

Types of Restructuring

Types of Restructuring

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#1 – Financial Restructuring

It happens mostly when the company’s sales start declining. So if earlier the company was mostly structured with debts, then with sales taking a hit, it will be difficult for the company to pay its fixed interest every year. In that scenario, the company’s try to reduce debt and increase equity as inequities; no fixed payments are required.

Similarly, if an organization is planning to take up a project and they are quite sure about the profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's more of the project, then they will go for debt financing as they know that they can repay the debt from profit and will be able to enjoy the extra profit.

#2 – Organisational Restructuring

It is done to reduce the operational cost of the business internally. If the hierarchical chain in an organization is very long, then that is not cost-effective as too many promotions will be involved, which in turn will lead to more salary to employees. So in organizational restructuring, the organization tries to find loops inside the organizational structure and starts to act on it by cutting down inefficient employees, removing unwanted positions, reducing the salary of top management, and so on.

Examples of Restructuring

Example #1

Company ABC sees that the interest rate is decreasing in the market. So it will be cheaper to raise debts now. So if company ABC has more equity in capital structure, then it should opt to change the capital structure now. It should reduce its equity position by buying back shares and increase debt position by issuing new debts in the market. It, in return, will decrease the weighted average cost of capital for the company.

Example #2

The salary of the CEO mostly depends on the size of the organization. So if the board of directors finds that the company in the past has acquired unrelated businesses just to increase the size of the company so that the salary of the CEO gets increased, then the board of directors may decide for a capital restructuring which will sell of the unrelated businesses, making the company cash-rich and decreasing the CEO’s salary. These restructure are very important in the long run of any organization.


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How Does Restructuring Work?

Restructuring Valuations

Restructuring is mostly done to increase the valuation of the company, and there are two situations when valuation –

#1 – Synergy

#2 – Reverse Synergy

Characteristics of Restructuring

  • Unrelated business is sold off to improve the valuation of the company.
  • Downsizing of business by closing down or selling of businesses that are no longer profitable;
  • Concentrating business in few locations possible rather than spreading it all over and increasing the cost;
  • Taking advantage of the change in the interest rate in the market by reissuing debts with lesser interest rates;


Restructuring is an important step taken by organizations to help them sustain in the long run. It is beneficial as the new organization after the restructuring is more efficient and cost-friendly. It also helps to increase the value of an organization.

This article has been a guide to what is restructuring and its meaning. Here we discuss two types (Financial and Organizational) of restructuring along with its characteristics, valuations, and examples. You can learn more about accounting from the following articles –