When is a pre-pack normally used?
A pre-pack is predominantly used when a company is intending to go into administration. It is also possible to use a pre-pack with a company liquidation, but it is much less common because an administration is a more effective way of allowing a business to trade, albeit temporarily. An administration provides a stop on legal proceedings being brought against the company during the period of administration. This gives much needed breathing space from creditors in order to allow for the sale to proceed successfully.
What is a pre-pack?
The pre-pack is essentially a pre-packaged sale of a company’s business or assets, or parts of both. It is set up and negotiated in advance of the appointment of an administrator, with the intention that the sale takes place as soon as the administrator is appointed.
It is vital with a pre-pack administration sale that a potential administrator is consulted at the earliest opportunity. The administrator has vast experience of these sales, and will get involved in the sale before they are appointed, which will ensure that the sale is compliant and that there are no validity issues further down the line.
What are the advantages of a pre-pack sale?
- The company is still trading and therefore the value of the business and assets can be higher than if the company had ceased trading. Frequently the significant asset in a pre-pack sale is the value of the goodwill, which is often lost as soon as the company ceases to trade.
- The use of an administrator in a pre-pack sale means that an independent professional is involved at an early stage. This can avoid challenges to the sale later on, because the administrator will ensure the sale is compliant with regulations and not prejudicial to creditors. This is particularly important for directors to protect their position against any personal liability claims in the future.
- Involving an administrator early means the administrator can advise on changes in contracts, liaising with customers, suppliers, landlords and financiers to get them on board with the sale. Cooperation with stakeholders is vital in any pre-pack administration sale of a business.
- One of the key advantages of a pre-pack administration sale is to sell the viable parts of the business and get better value for assets, which is often lost in a liquidation sale when trading ceases. This will provide more return to a company and therefore a return to its creditors than if the company was put into liquidation and the assets sold on a break-up basis.
- The pre-pack sale is usually agreed on a confidential basis which can protect the business from adverse publicity.
- A pre-pack sale is often to one or more of the current directors. The reality is that if the business were to be marketed on the open market, then it is unlikely it would be sold to anyone else. A pre pack means there will be at least some money coming back in to the administration compared to a liquidation sale where without a pre-pack where there would be no sale proceeds coming back for the benefit of the creditors.
Disadvantages of a pre-pack
The main disadvantage is that a pre-pack suffers from a public perception that the business is sold secretly to the original business owners for very little money, leaving behind the creditors.
This is being addressed by insolvency legislation to make the process far more transparent and to give creditors some comfort in this regard. There are very stringent guidelines for administrators around pre-packs that need to be followed in order to try to alleviate public concerns.
At Francis Wilks & Jones we act in pre-pack sales for all parties on a regular basis, working alongside top insolvency practitioners. Contact us to discuss whether a pre pack sale this might be the right option for your business.