Despite offering a valuable lifeline to struggling businesses, pre-pack administration is often misunderstood. Pre-pack administration involves arranging the sale of a business before formal administration begins, allowing the company to immediately continue trading under new ownership. However, associations with financial distress and the fact that negotiations are typically held on a confidential basis have led to misconceptions about the fairness and purpose of the pre-pack process.
While pre-pack administration is not right for all struggling businesses, the reality is that the process is highly regulated and designed to achieve the best possible outcome in otherwise challenging circumstances. To help clarify the facts, let’s explore five of the most common misconceptions about pre-pack administration and reveal why it can be a crucial tool for business recovery.
Jobs Are Lost
When a business is sold in any way, employees are naturally implicated. Jobs can change, roles can shift, and this leads to the common misconception that pre-pack administration will always have a negative impact on employees. The reality is that pre-pack administration is worlds away from fears of mass redundancies and employee vulnerability, as preserving jobs is often one of the key goals of a pre-pack sale.
In fact, employees are often viewed as one of the most valuable business assets when a business is sold in pre-pack administration. The new owners will typically recognise the value of experienced staff and their critical role in ensuring continuity in operations when ownership does change hands. This is not to say that there will never be redundancies in pre-pack administration, but ultimately the process is much more effective at saving jobs compared to an alternative like liquidation.
Creditors Get No Say
As well as employees, creditors are another stakeholder heavily implicated in the pre-pack administration process. It’s similarly assumed that creditors will be cast aside during a pre-pack sale but this could not be further from the truth. Creditors are actually heavily protected during the process by the work of a licensed insolvency practitioner and the rules outlined in the Statement of Insolvency Practice (SIP) 16.
All pre-pack administrations must be overseen by an insolvency practitioner who must be able to demonstrate that the agreed sale is in the best interests of creditors. They will carefully evaluate the proposed sale and compare it to other options, ensuring that creditors receive the best possible return. However, creditors also have the right to appeal if they believe the process has not been conducted fairly. Far from being ignored, creditors are actually at the very heart of the decisions made during pre-pack administration.
The Process Is Unethical
It has long been assumed that pre-pack administration is an unethical process, benefitting insiders at the expense of creditors and other stakeholders. However, we have already seen that this is not the case as pre-packs are highly regulated to ensure creditors get the best outcome.
Further scrutiny is also applied in cases where the buyer is connected to the business in some way, such as a director or shareholder of the company. As well as having to comply with the rules of SIP 16, these transactions can also be verified by the Pre-Pack Pool, giving stakeholders the reassurance that the sale has had a level of independent scrutiny and has been verified as both fair and reasonable.
The Business Will Be Undervalued
Some believe that pre-pack sales undervalue a business, allowing buyers to acquire assets at a bargain price. This is a misunderstanding of how the process actually works as pre-pack administration requires a fair market valuation to guarantee that the sale price reflects the true worth of the business and its assets. As part of their justification of the pre-pack sale as per SIP 16, the insolvency practitioner is required to document and justify the valuation to prove that the sale provides the best outcome for creditors.
What is important to remember is that a pre-pack sale is not about undercutting the value of a business but preserving it. The swift nature of the pre-pack process is designed to prevent the losses of insolvency proceedings and give the business a fair chance at future success under new ownership.
It’s A Sign Of Failure
There is also a widespread assumption that entering pre-pack administration is a sign of business failure and the end of the road. However, pre-packs are often a strategic fresh start, allowing a business to shed unmanageable debts and restructure for growth. The process provides a clean slate, enabling the company to address underlying issues and move forward with renewed focus.
Rescue Your Business With Ballard Business Recovery
While misconceptions have historically clouded the pre-pack administration process, the reality is that this type of business sale is conducted under strict regulatory oversight to ensure fairness and transparency. For businesses facing financial distress, a pre-pack can therefore offer a vital lifeline and path to recovery.
At Ballard Business Recovery, we specialise in guiding businesses and stakeholders through complex financial challenges. If you’d like to explore your business recovery options, including how pre-pack administration could benefit your business, don’t hesitate to contact us.
