If financial pressures are mounting for your business, you may be left searching for a solution that can preserve what is left while putting in place a clear route to recovery. Pre pack administration is one such process that can play this role and transform a failing business. While pre pack administration is shrouded with a number of lingering misconceptions, when used appropriately, it can provide a valuable opportunity for a strategic and structured reset.
With this in mind, we have put together this article to explain how pre pack administration can be an effective method of business rescue and provide the lifeline you need in difficult times.
What Is Pre Pack Administration?
Pre pack administration is a formal insolvency process which involves arranging the sale of a business before it officially enters administration. As soon as an administrator is appointed, the agreed sale can be executed immediately and the business can continue trading with minimal disruption. Rather than halting operations or allowing stakeholder relationships and overall reputation to deteriorate while a suitable buyer is sought, pre pack administration enables a smoother transition to recovery.
How Pre Pack Administration Supports Business Rescue
It’s important to note that pre pack administration is not a miracle cure for every struggling business. For the process to work, there needs to be a fundamentally sound operation underneath financial difficulties. However, when the circumstances are right, pre pack administration offers a unique set of advantages that can support business rescue.
Preserves Continuity
Delays can be disastrous when your business needs to be rescued. While the typical company administration process is designed to also preserve the life of a business, delays or challenges when finding a suitable buyer are natural and these events can quickly erode customer trust, destabilise supply chains, and drive staff away.
By contrast, a pre pack sale ensures these key assets are preserved from the outset of any new ownership structures. While the new owners (whether existing directors or an external buyer) may implement new processes and put their own stamp on things, the immediate continuity from old to new can be key in preserving both the reputation and value of your company.
Protects Operational Know-How
One of the most compelling arguments in favour of pre pack administration is its ability to protect jobs and operational know-how. By agreeing a sale in advance, you can typically transfer staff to the new entity with minimal disruption for all parties. This allows for expertise, relationships, and business knowledge, all to be retained and these insights are incredibly valuable when it comes to maintaining performance and keeping things running smoothly after a transition in ownership.
Makes The Most Of The Viable Elements Of The Business
In many cases, financial difficulty and possible insolvency are not necessarily the result of poor operations. Unsustainable debt, contractual burdens, and even one-off events can all cause a business to fail. If this applies to your circumstances, pre pack administration can be a good way to separate the viable parts of the business from any liabilities dragging it down.
Think of it as a clean slate from which the business can move forward without any historic debt making it unviable. It is, however, important to note that pre pack administration is not about dodging obligations. Any sale must be overseen by a licensed insolvency practitioner, conducted transparently, and provide the best return to creditors.
Ensures Best Outcomes For Creditors
Though it may seem counterintuitive, pre pack administration can actually deliver better returns for creditors compared to the standard company administration process or liquidation. With pre pack, the business is sold as a going concern and this means that it is typically worth more than the sum of its parts. The risk of asset value deteriorating over time is also reduced in comparison to any drawn-out insolvency proceedings.
Clear Transparency
Historically, the pre pack administration process has faced criticism due to a sense of perceived secrecy, particularly in cases where the business is being sold back to existing directors. However, pre pack administration is now subject to strict oversight and this allows for the business to be sold and rescue to be targeted with full transparency.
All pre pack sales must adhere to the Statement of Insolvency Practice 16 (SIP 16), which requires detailed disclosure to creditors about the circumstances and justification for the sale. Connected party sales are also subject to independent scrutiny via the Pre Pack Pool, ensuring that the rescue is in the best interest of all stakeholders, not just those close to the business.
Is Pre Pack Administration Right For My Business?
There is no doubt that pre pack administration can be a very valuable business rescue tool. It’s most effective if your business is fundamentally viable but held back by specific financial burdens as opposed to systematic operational failure. However, the process must be implemented correctly and swiftly, which can be challenging for businesses lacking interest from buyers or without the right creditor support.
With this in mind, it is crucial to seek expert advice if you are considering pre pack administration for your business. This will help you to fully understand all of your options when faced with financial distress, and move forward knowing you have chosen the right solution.
At Ballard Business Recovery, our business rescue experts specialise in helping company directors navigate periods of uncertainty with confidence. If you would like to understand whether pre pack administration could rescue your business, please get in touch with us.
