Difference between Internal and External Reconstruction
When it comes to business, change is sometimes necessary. This may involve restructuring of the company to make it more efficient, profitable and productive. Two common types of restructuring are internal and external reconstruction. Although they may seem similar, there are significant differences between these two forms of reconstruction. In this article, we will explore the differences between internal and external reconstruction.
What is Internal Reconstruction?
Internal reconstruction refers to the process of restructuring a company from within. This means that the company makes changes to its internal structure, procedures, and policies to improve its operations. Internal reconstruction may involve a change in management, the introduction of new technologies, or the adoption of new business models. It is initiated by the management of the company itself, and it is done to enhance the company’s performance.
One of the advantages of internal reconstruction is that it allows the management to control the process. The company can make changes that are tailored to its specific needs, and it can implement these changes at a pace that is convenient for the organization. Additionally, internal reconstruction is usually less disruptive than external reconstruction.
What is External Reconstruction?
External reconstruction refers to the process of restructuring a company by seeking external help. This means that a company hires a third-party consultant or investment bank to undertake the restructuring process. Typically, external reconstruction involves selling parts of the company or merging with another organization to form a new entity.
One of the significant advantages of external reconstruction is that it may provide access to new capital, management expertise, and markets. Additionally, it may allow the company to divest underperforming assets, reduce debt, and improve efficiencies. However, external reconstruction may be costly, time-consuming, and disruptive.
The Main Differences between Internal and External Reconstruction
The primary difference between internal and external reconstruction is the source of the restructuring process. While internal reconstruction is initiated by the company’s management, external reconstruction is initiated by external forces such as competitors, regulators, or creditors.
Another significant difference is the degree of control that the company’s management has over the restructuring process. In internal reconstruction, the management has complete control over the process and the changes made. However, external reconstruction typically involves ceding control to external parties such as consultants or investors.
Finally, the cost and resources required for the two forms of reconstruction differ significantly. While internal reconstruction may require minimal cost, external reconstruction may involve significant costs, including hiring consultants, legal fees, and transaction costs.
Conclusion
In conclusion, whether a company chooses internal or external reconstruction, the primary goal is to make the organization more efficient, profitable, and productive. Internal reconstruction is initiated by the management, and it allows for more control over the restructuring process. On the other hand, external reconstruction is initiated by external forces and is more disruptive, but it can provide access to new capital, management expertise, and markets.
Table difference between internal and external reconstruction
| Internal Reconstruction | External Reconstruction | |
|---|---|---|
| Meaning | Reconstruction of a company’s balance sheet by adjusting its own assets and liabilities | Reconstruction of a company’s balance sheet by including assets and liabilities of other companies or entities |
| Scope | Limited to the company and its own assets and liabilities | May involve multiple companies or entities, beyond just the company being reconstructed |
| Purpose | To improve the financial position of the company by reorganizing its own assets and liabilities | To change the ownership or control of the company, or to reduce debt by transferring assets/liabilities to another entity |
| Approval Required | Can be done only with the approval of shareholders, creditors and High Court/ National Company Law Tribunal | Approval of shareholders, creditors and High Court/ National Company Law Tribunal required, as well as of other companies/entities included in the reconstruction |
| Impact on Stakeholders | Impacts only the company being reconstructed and its shareholders, creditors and employees | Can impact multiple companies and entities, the shareholders, creditors and employees of those companies, as well as other stakeholders like customers and suppliers |