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Posted: May 26, 2009

Companies: Take this opportunity to look inward

Economy lends itself to restructuring and cherry-picking talent

Samuel Edwards

Recently, a panel presenter noted that “if your business model is more than six months old, it’s probably obsolete.” I think the same thing could be said about your business’ structure. If you haven’t revisited the capital structure, asset deployment, personnel and other aspects of your business’s structure, you may be missing critical opportunities. 

The U.S. economy may start to recover by late 2009 or 2010, but we probably shouldn’t expect a return to the frantic economic pace of 2007 anytime soon. Particularly in the mergers and acquisitions world, activity has slowed dramatically. Businesses will need to adjust for smaller markets and slower demand for years to come. 

But it may be worth considering whether this period of relative inactivity could provide an opportunity for internal reexamination and reorganization.

Asset and stock values are down significantly, which can make this a good time to tax efficiently restructure existing business units. Spinning off divisions or subsidiaries while value is lower typically generates significantly fewer taxes, especially while dividend and capital gains rates are still low. 

For a business with a growing subsidiary, now may be the perfect time to separate this unit and allow it stand on its own, raising the capital it needs directly, hiring its own management and positioning itself for growth as the economy starts to turn.

For the less fortunate, restructuring liabilities now can be critical to emerging from a debt overhang in time to participate in the rebound.  Given the general state of the economy, lenders are more willing to write off bad debt or adjust terms, especially if they believe they are getting as good a deal as possible under the circumstances.

The key to debt restructuring is often coming up with a comprehensive, transparent plan that deals with all liabilities and allows each creditor to see that they are not giving up any more than the others. Doing so requires initiative and foresight, but may help a struggling business realign its debt service costs with a realistic projection of revenues going forward.

Working with existing lenders is also easier than trying to attract new ones, with the debt markets still largely frozen. Allowing enough time to restructure liabilities while some cash is still remaining is also crucial, as more and more companies that actually enter bankruptcy are being wound down instead of restructured.

Restructuring a business’s human resources can be the final piece to the puzzle. During difficult times, executives often focus on cutting costs and eliminating unnecessary personnel. But with many businesses forced to layoff employees, those that can afford to need to think seriously about cherry-picking newly available talent. 

Lower revenues and profits also translate to lower equity values and mean that employees’ stock options or other equity incentives may no longer be the motivating force they were previously. Businesses should carefully evaluate where re-grants or new grants of equity to key personnel makes sense as a retention tool. You don’t want to successfully ride out a recession only to find your best employees walking out the door as competitors start hiring again.

All of which goes to say that although many businesses are facing enormous challenges in the current market, opportunities do exist for those with a longer perspective. The economy will eventually recover — it always does. The question is: Who will be poised to take advantage of that recovery when it comes?

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Sam Edwards is an associate in Holland & Hart's Denver office. He concentrates his practice in corporate and securities law, with an emphasis on venture capital and private equity financings, mergers and acquisitions, general corporate matters including choice of entity and formation, corporate structuring and restructuring and commercial matters such as lending and borrowing, employment and licensing and sales. Mr. Edwards also counsels the boards of publicly and privately held companies on a variety of matters, including fiduciary duties, corporate governance and disclosure and compliance issues. He can be reached at (303) 295-8053 or seedwards@hollandandhart.com.

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