Quasi-Reorganization

Categories: Incorporation

A “quasi-reorganization” is kind of like the Flex Tape of the business world: it can help a company eliminate its financial woes without actually, fundamentally fixing the issue that caused the woes in the first place. Sometimes, companies can find themselves in a situation where they’ve got a big ol’ deficit in retained earnings. This looks bad on the balance sheets, plus it means that the business (a) can’t pay dividends (because paying out dividends when a business is in debt is a no-no), and (b) is likely scaring off some potential would-be investors with its problematic financials.

In some cases, companies in this predicament would go ahead and file for bankruptcy, which is a pretty drastic measure. But there is another option: the quasi-reorganization.

In this situation, the balance books are basically reset to zero. The organization is given a fresh financial start. The game has been restarted. The deficit in retained earnings is reclassified as paid-in capital, and all assets are revalued according to current market value (which is usually lower than the value initially recorded). No debts are actually paid, and no extra money is physically coming in. All you're doing is moving financial data and transactions around to make the books look better.

If this sounds shady, it can be. But sometimes it’s not. For example, it’s not unheard of for a new business to operate at a loss for its first few years. But we don’t want those operating losses following us around for the rest of our lives, so once we start turning a profit, we’ll go the quasi-reorganization route, so we can essentially start over in the eyes of the investment world. Plus, if we move all that deficit stuff over to the paid-in capital side of the equation, we can start paying out dividends, which shareholders tend to like. It’s not an ideal solution all the time, and in fact, it’s not even legal in every state to do this. It’s actually a pretty obscure accounting method in real life, but it just might be a good choice for a company looking to restart its financial game clock.

Related or Semi-related Video

Finance: What is Reduction in Force (RIF...1 Views

00:00

and finance Allah shmoop What is reduction in force or

00:07

riff firings People like from a reality TV show Well

00:12

it was the best of times It was the worst

00:14

of times Your company has performed horribly and it needs

00:17

to cut jobs well just pay the interest on the

00:20

debt it knows so it must reduce its workforce And

00:23

it fires well pretty much everyone not in a core

00:26

position What is core Well at Ford Motors The people

00:30

who make the engines are core the secretary to the

00:33

person who lobbies the Gove to say nice things about

00:36

Ford cars Safety track record Well she's not core although

00:39

we love her But sorry As the man says you're

00:42

fired Reductions in force happened when things go awry and

00:46

companies must scramble simply to pay the rent Yeah tough

00:49

times but you know welcome to the NFL Reductions enforce

00:53

happened for other reasons as well Think some natty combination

00:56

of robots replacing highly paid union workers more efficiently and

01:00

or the spread in cost between manufacturing your whoopee cushions

01:03

in Chicago versus making them in Beijing have a big

01:06

spread in those costs Well when the robots can't do

01:09

the job better cheaper faster than the humans Why wouldn't

01:12

accompany replace the union workers It's way cheaper to hire

01:15

robots a mental complaint or strike At some point some

01:18

shark manager will ask Why are we fighting this difficult

01:21

fight Let's move production overseas And when that goes smoothly

01:25

while the company yeah usually induces a gigantic reduction in

01:29

force ending the domestic jobs of some multiple thousands of

01:32

whoopee cushion makers or W CMEs as they call them

01:35

in the trade Or you know in the biz that's

01:37

what happens Work forces are obviously a heated topic among

01:41

politicians as well Phyllis fired workers generally don't vote for

01:44

more of the same because we live in such a

01:47

litigious society today Well firing any individual worker could lead

01:51

to an ugly lawsuit for a variety of reasons as

01:54

well One of them might exist in one form or

01:56

another of what is called a protected class and those

01:59

classes is comprised subsets of gender sexual preference ethnicity race

02:04

age religion and myriad other classes including yes mermaids So

02:08

when a giant reduction in force happens and essentially everyone

02:11

in the group is fired while the risk of these

02:13

kinds of lawsuits is dramatically mitigated but it's sad in

02:16

any way shape or form Riffs aren't fun for anyone

02:19

and well additionally everyone really loved Martha the PR secretary

02:22

who had been at the company for 27 years and

02:25

never forgot a birthday Unfortunately the world got rough for

02:27

Martha and she had to go to at the end

02:29

of the day shareholders on the company And it's their

02:32

call is toh how they want it run There is

02:34

no crying in baseball but lots of crying when there's

02:37

a riff Sorry we're

Find other enlightening terms in Shmoop Finance Genius Bar(f)