Reorganization (from the Latin sanatio – treatment, recovery) is a system of measures aimed at preventing the liquidation of an enterprise due to the onset of ghosts of bankruptcy. At the same time, either the owners of the enterprise, or creditors, or other persons (including executive authorities) provide the debtor with targeted financial assistance, provide preferential loans, preferential taxation, etc. State financial support is provided to those enterprises that, if there are appropriate opportunities, are able to effectively use the funds received in a short time.
Depending on the depth of the crisis state of the enterprise and the conditions for providing it with external assistance, there are two main types of reorganization:
1) without changing the status of the legal entity of the enterprise being rehabilitated (such reorganization is usually carried out to assist the enterprise in eliminating its insolvency, if its crisis state is considered as a temporary phenomenon);
2) with a change in the status of the legal entity of the enterprise being rehabilitated (this form of reorganization is called the reorganization of the enterprise and requires the implementation of a number of reorganization procedures related to the change of its form of ownership, organizational and legal form of activity, etc. It is carried out in a deeper crisis state of the enterprise).
Each of these types of reorganization of the enterprise has a number of forms:
Reorganization of an enterprise aimed at reorganizing the debt (without changing the status of the legal entity of the enterprise being rehabilitated) has the following main forms:
a) Repayment of the debt of the enterprise at the expense of the budget. Only state-owned enterprises are sanitized in this form. It is related to the following basic conditions:
ensuring the further development of priority sectors of the economy; sectoral or intersectoral reorientation of the enterprise’s activities; implementation of antimonopoly measures; for other purposes at the initiative of the bodies authorized to manage state property.
b) Repayment of the company’s debt at the expense of a targeted bank loan. This form of reorganization is carried out, as a rule, by a commercial bank serving the enterprise, after a thorough audit of the activities of the latter.
Since the provision of such a targeted loan has a very high level of risk, the interest rate on it usually reaches a maximum value.
One of the options for this form of reorganization can be the re-registration of short-term loans of the enterprise into long-term ones (with a corresponding increase in interest rates). To exercise control and assistance to the enterprise, a commercial bank in the list of conditions for reorganization may require the introduction of its representative (or authorized person) into its management.
c) Transfer of debt to another legal entity. Such a legal entity can be any enterprise engaged in entrepreneurial activities that wished to participate in the reorganization of the debtor enterprise. The conditions for such a debt transfer are stipulated by a special contract. However, such a transfer of debt requires the mandatory consent of the creditor (if the creditor does not consent to the transfer of the debt to another person, the debtor enterprise does not have the right to do so, since this would mean a unilateral change in the terms of the loan agreement). If the creditor agrees to transfer the debt to another person, the new debtor has the right to raise all objections against the creditor’s claims based on the contractual relationship between the creditor and the first debtor.
d) Issuance of bonds (and other debt securities) under the guarantee of the sanatorium. This form of reorganization is carried out, as a rule, by a commercial bank serving the enterprise, if for some reason it is impossible to provide it with a direct bank loan (or reissuance of short-term loans into long-term loans). An insurance company can also act as such a guaranteeing sanatorium.
Reorganization of an enterprise aimed at its reorganization (with a change, as a rule, of the status of a legal entity of the enterprise being rehabilitated) has the following main forms:
(a) Merger. This form of reorganization is carried out by combining the debtor enterprise with another financially stable enterprise. As a result of such an association, the debtor enterprise loses its legal status. In the process of merger, enterprises merge (consolidate) their balance sheets. For the sanatorium, the motive for merging with the debtor enterprise may be the synergy effect associated with new opportunities for internal cooperation, diversification of products or sales markets, etc. For the enterprise being rehabilitated, the merger ensures the preservation of jobs and the direction of production activities;
b) Takeover. This form of reorganization is carried out through the acquisition of a debtor enterprise by a sanatorium enterprise (for the latter, this is one of the forms of investment – the acquisition of an integral property complex or the bulk of its assets). The reorganized enterprise usually loses its independent status during a takeover, although as a legal entity it can remain in the form of a subsidiary;
c) Separation. This form of reorganization can be used for enterprises engaged in diversified economic (production) activities. The effect of this form of reorganization is that due to a significant reduction in the superstructure of the administrative apparatus, non-production and auxiliary services, production costs are significantly reduced.
The possibility of restoring the solvency of the enterprise is formalized by the financial recovery plan (business plan). A typical financial recovery plan should include the following sections:
1. General characteristics of the enterprise.
2. Brief information on the financial recovery plan. It includes measures to restructure the activities of the enterprise, the implementation period of the plan, the amount of necessary financial resources, the maturity of assistance, the financial results of the implementation of the plan.
3. Analysis of the financial condition. A free table of financial indicators of the enterprise, analysis, conclusions is given.
4. Measures to restore solvency and support effective economic activity.
5. Market and competition. Contains information about the industry in which this enterprise operates, its current state and development prospects.
6. Activities in the field of marketing of the enterprise. The marketing strategy is described, characterized by strategies of market penetration and growth of the enterprise, channels of distribution of products, communications.
7. Production plan. The production program, the number of employees, the wage fund, the cost estimate and product calculation are calculated.
8. Financial plan. Profit, current value, net present value, internal rate of profitability, payback period, break-even point are determined.
9. Conclusions.
Experts have proposed the following ways of reorganization. The first way of reorganization is the replacement of the head and management personnel who put the enterprise in a difficult financial situation.
The second way of reorganization is the sale by court or by agreement of creditors. When selling an economically unsuccessful enterprise, it remains as an operating one, but the owners change. The third way of reorganization is the exchange of debts for shares. In this situation, the owners also change. However, creditors are cautious about exchanging debts for shares of an insolvent enterprise if they do not have confidence that it will again become profitable and financially sustainable. The fourth way of reorganization is the assignment of claims to third parties, that is, the purchase of debts with subsequent resale for a certain percentage of the transaction. The fifth way of reorganization is to reduce the share of inefficient technologies and low-margin products, create new types of products, services and new technologies by intensifying innovation and investment activities.
In any case, for the implementation of reorganization, a business plan and forecasting of the economic situation in the short and long term are needed.
In any of the options, reorganization is the most time-consuming operation, and in most cases imply a complete restructuring of the enterprise. The preservation of the enterprise depends on how quickly and how effectively it will be able to get rid of all undesirable phenomena.