If you are on the lookout for a turnaround project, the right opportunity could come along in a number of ways. Some deals can be completed in one straightforward action without the distressed business’s insolvency practitioner ever having to market the business for sale (in the case of a pre-pack deal).
Others will involve buyers competing with each other to become the new owner of a business or its assets on the open market. Let’s look at the different scenarios from a buyer’s perspective:
What is a pre-pack sale?
Sometimes, when a business is in distress, a takeover deal can be made before the business even appoints an insolvency practitioner. The deal is negotiated and sewn up without the business ever being put on the market and without buyers ever having to be sought by the administrators.
In these scenarios, the buyer is very often a management team from the business, or a ‘newco’ that has been set up in order to take over the business specifically through a pre-pack deal.
What is the alternative to a pre-pack deal?
When a business falls into administration and a pre-pack buyer is not on the cards, administrators will set about maximising the value of the business’s assets and finding a buyer for part or all the distressed operation, as per the rules set out by the Insolvency Service.
As a buyer, what are the benefits of a pre-pack deal?
- Business continuity
When a business is sold in a pre-pack deal, it is possible for the customers and even sometimes the staff, to be unaware the business was ever in distress. The business is often able to continue operating in the same way throughout the process with little or no disturbances. The pre-pack deal can transfer ownership of a business very quickly and with minimal disturbance to the daily running of the operation.
For the buyer, this means less damage to business reputation and a seamless transfer to new owners – providing a good job is done in terms of staff communications and relationship building.
- Value protection
When you buy a business in distress, retaining its value is a major positive and buying through the use of a pre-pack deal will help with this. When a business publicly falls into administration and is marketed by an insolvency practitioner, its value will inevitably fall, which means, as a buyer, you will be purchasing a business whose value and reputation need some serious work.
- Retention of staff
When a business is bought through the pre-pack route, the buyer takes over the employment contracts for the staff under the Transfer of Undertakings Protection of Employment Regulations (TUPE). This means that you will retain the staff who could be vital to the turnaround process. A strong staff can be your biggest asset in understanding what went wrong with the business you have bought and how to make amends. Experienced staff will be able to show you the ropes, continue relationships with key suppliers and customers, and train new recruits.
And what are the benefits of buying a business from administration instead?
When buying a business from administration, the insolvency practitioners selling the business’s assets needs to get the best returns for the creditors. However, this does not mean that you won’t be able to secure a bargain. When a business has fallen into administration, desperate times require desperate measures and any sale is better than no sale, meaning a good deal is often negotiable.
- Confidence you’re paying what the business is worth
As well as the possibility of getting a better deal, you will also have more confidence that you have purchased a business at the right price once it has fallen into administration. The insolvency practitioner is likely to have marketed the business and contacted prospective buyers before deciding on who to pass the business to.
This process of feeling out the value of the business can be a useful stage to have gone through for the eventual buyer, as it means not paying over the odds, which can happen in a pre-pack scenario.
- Better terms with creditors
Creditors are sometimes less than happy when a pre-pack deal has been negotiated without their knowledge. When buying a business from administration, creditors will usually feel that the process has been more transparent and inclusive of their requirements, which may leave them more likely to lend again once you have the business back on its feet.
The fact that an IP is not usually involved in the initial deal negotiation process can also be a negative when it comes to buying through a pre-pack arrangement. Arranging a purchase through an IP and through the proper insolvency process means that everyone has to play by the rules and every party should benefit in some way.
- Possibility of undertaking an assets-only purchase
When you find a business in administration that you would like to purchase, you may be able to negotiate a deal whereby you take just the assets that you feel have value. If you need certain assets to bolt onto your existing enterprises, for example, you may be able to buy these at a fair price without having to take on the entire distressed business.
Then, there is of course the fact that, once a business enters administration, turnaround practitioners are actually able to bid for these distressed assets. Pre-packs result in other buyers being excluded from the sales process. As a savvy buyer with an eye for a great deal, you should be keeping a very close eye on administration lists in order to find just the right business in just the right market.