Page 302 - DCOM508_CORPORATE_TAX_PLANNING

Unit 13: Tax Treatment for Business Restructuring

13.1.2 Advantages and Disadvantages of Business Restructuring Notes

Business restructuring can be called to have the following below mentioned advantages and
disadvantages:

Advantages of Business Restructuring

1. Increasing Value of Parts: One of the main reasons that businesses use business restructuring
is to divide the business up for sale. If a company is trying to sell as a conglomerate, it will
likely get lower offers from investors. When the company is split up into separate parts,
it can often get better offers for those individual parts. This can increase the value of the
company as a whole and help get a higher sales price for the business.
2. Reduce Costs: Another benefit of restructuring a company is to reduce business costs.

Example: A company could merge with another company that is very similar and use

economies of scale to run more efficiently. It could cut back on employees and equipment to
streamline business operations. In this way, the company can expand its reach without adding
too much to the overhead of the business. If handled correctly, the company can add signifi cant
value for its shareholders.

Disadvantages of Business Restructuring

1. Costs of Restructure: Even though you can reduce long-term costs by restructuring
the business, the process of restructuring can be expensive in itself. When a company
restructures itself, it must pay legal fees and other costs associated with the restructure.
If a company merges with another company, it will also have to come up with the money
to buy the other company. If the restructure does not work out, it could cost the company
dearly and ultimately lead to its demise.
2. Hurt Employee Relations: When a company goes through a corporate restructure, it can

significantly hurt its relations with employees. Employees fear change and when they are
scared of being downsized, it can affect morale. In many of these moves, companies have to
release some of the workforce. This can affect the loyalty of employees and it could hurt the
company in the long run. When employees do not know if they will be one of the unlucky
few who get released, it can create tension.
Self Assessment

Fill in the blanks:
1. ………………… refers to a rearrangement of the corporate structure.
2. …………………… is the process where two or more companies dissolve their identity to
form a new entity.
3. Companies adopt ……………. strategy to sell subsidiaries or to get rid of non-profi t making
division of company.

4. …………… is the form of demerger where shareholders of existing company form a new

company to takeover specific division of existing company.

5. ………………… is an entity formed by two or more companies for a specific period with a
specifi c objective.

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