When business owners find themselves in situations where they are threatened with insolvency, they often have choices to make. One of these is whether to sell the business in what’s known as a ‘pre-pack administration’. This approach is a tried and tested way to sell off the assets of a struggling business, often saving it from insolvency and securing jobs.
WHAT IS A PRE-PACK ADMINISTRATION?
A pre-pack administration is a term used to define the process through which business owners agree to sell their assets to a third-party buyer, a trade buyer or the company directors before they appoint administrators. The actual sale then goes ahead as soon as the administrators are in place.
Let’s take a detailed look at the process:
WHEN WOULD YOU CONSIDER A PRE-PACK ADMINISTRATION?
There are several scenarios or ‘signs’ that might indicate to consider a pre-pack administration.
These scenarios include:
- Tax demands from HMRC that you are going to struggle to settle
- Landlords threatening action
- Warnings issued by banks or other creditors
- Fears that a winding-up petition could be imminent
- Business is in distress, due to factors, such as a loss of market share, too many employees or too expensive property
- Directors are worried about personal risk
At this point, many business owners should consider appointing insolvency practitioners to advise them on the processes and their choices going forward. The SIP 16 rules mean that all options need to be considered at this juncture.
WHAT HAPPENS NEXT IF A PRE-PACK DEAL IS DECIDED UPON?
The insolvency practitioners need to value the business and its assets and put together a Statement of Affairs, in order to start looking for a buyer.
One option is to sell the business to an existing company, such as businesses already operating in the industry (a trade buyer). If this option is preferred, then the insolvency practitioner sets about obtaining the required evidence from the buyer than they are financially capable enough to complete the transaction and provide continuity of the business.
If the plan is to sell the business as a growing concern to the directors of the firm, they must establish a ‘newco’, whose financial viability also needs to be assessed by the insolvency practitioners, in order for the sale to go ahead. The newco must provide, for example, detailed profit, loss accounts, as well as cash-flow and balance sheet forecasts.
THE NEXT STEP
Once the buyer is identified and their financial viability is checked out, the business will be put into administration, which in turn means that all legal action against the business from creditors must stop.
In a regular administration process, the administrators would now set about marketing the business for sale in order to actively seek a buyer. However, in the case of a pre-pack deal, the buyers have already been found and the deal has already been negotiated and verified.
Despite a buyer already having been sought, the insolvency practitioners must still market the business for sales and offers that could be received. This is down to the insolvency regulations and is intended to ensure that pre-pack administrations are carried out ethically. After all, the priority is to obtain a fair price for the business to repay the creditors.
If offers are made, an independent valuation of the business must be carried out. The business could end up being sold to the highest bidder, however, they are not necessarily the newco or the third party intended to buy the business in the pre-pack deal.
ADVANTAGES OF A PRE-PACK ADMINISTRATION:
- You can retain continuity of business if the pre-pack sale goes through without hitch. This can protect income, jobs and contracts, and increase the chances of the business surviving and thriving in the near future.
- In some cases, pre-pack administrations are the only way a business will be able to generate any cash to repay the creditors.
- The entire process can often be carried out extremely covertly to protect a business’ reputation.
DISADVANTAGE OF A PRE-PACK ADMINISTRATION:
- If the assets of the business are not valuable enough to cover the debts owed to the creditors, a pre-pack deal might not be the best solution.
- Clients and financiers may not be supportive of a pre-pack deal, especially one involving a newco.
- The receipt of higher offers from third party buyers is out of the business owner’s control and could mean, for example, that the business is sold to competitors. Although it may then be possible to buy the business back, this isn’t necessarily the case – so risk is involved.
HOW CAN DIRECTORS FUND A PRE-PACK PURCHASE?
If the directors need extra funding in order to complete the pre-pack deal, there are various financiers that will be able to help in most scenarios. For example, invoice factoring is a very popular source of funding for pre-pack administrations, as well as asset financing, bank loans, and venture capitalists, among others. There is an increasing number of options for people looking to fund pre-pack administrations, as new specialist lenders are popping up all the time.
Whether you are a business owner looking to sell your business assets in a pre-pack administration, or a buyer looking for a good deal through this route, there is a lot to be said for the pre-pack approach.
Providing the funding is in place to make a success of the business, following an acquisition, and the creditors are likely to be happy with the outcome, pre-pack administrations are often the quickest and easiest way to sell or buy a distressed business.