Pack up your troubles: The pre pack administration process
Pre-pack administration is often seen as something ‘big companies do’. But we believe this process can be a real alternative for all struggling businesses.
Could it work for you?
Let’s look at the what, why and how of pre-pack administration process.
What is a pre-pack administration?
Keeping it simple: a pre-pack administration is an insolvency process where a company with a sound core business enters into an agreement to sell its assets to a buyer.
This buyer might be a competitor, third party or the existing directors operating under a new company name (normally called a ‘newco’).
The pros and cons of the pre-pack
Pre-pack administrations mostly happen when a business needs to take drastic action because there’s an imminent threat of a creditor starting a winding-up petition. But it’s not all doom.
The pros
- Your business operates normally without any interruption, helping to preserve the value of the business if it is sold.
- Once a business plan and purchase contract are drawn up, you’re effectively protected by the court.
- Debts are written off.
- A pre-pack can be completed in as little as 24 hours.
- Creditors also benefit from a pre-pack, as the company can be sold for a higher price.
- There can still be some control for directors.
The cons
- The announcement of a pre-pack administration might appear in the press.
- It can leave unsecured creditors feeling they’ve been ‘left high and dry’
- A competitor could buy the company – they’re often the most likely buyer.
- The directors’ position might be in jeopardy: the new owners may want their own people in charge.
- You must adhere to the TUPE rules. And all staff jobs need to be protected.
- If you’re going for a newco then your assets and business must be independently valued.
- If the company owes HMRC they may require a VAT security deposit to move forward.
Your rough guide to the process
If you think a pre-pack administration is for you, here’s a simple step-by-step guide on what’s next.
Step 1: Look at the options.
Before opting for a pre-pack the directors must look at all options, including company voluntary arrangement (CVA), trade sale, refinancing, administration, and a creditors’ voluntary liquidation. If, or when, they decide on a pre-pack administration they must pass a resolution at a meeting stating they will consider the option in greater detail. This generally leads to Step 2.
Step 2: Appointing a licensed insolvency practitioner.
The SIP 16 rules stipulate that insolvency practitioner (IP), like F.A Simms makes the final decision on whether a pre-pack administration is the right course of action. This is to ensure that creditors are given enough information to understand the circumstances surrounding that decision.
Step 3: Create the business plan.
If your goal is for a newco to emerge from the pre-pack, you’ll need a business plan. Include profit and loss, cash flow, and balance sheet forecasts. Any administrator needs these as evidence that a viable company is being created. The newco will also need finance to fund the eventual acquisition. If you’re an SME expect to be asked for personal guarantees.
Step 4: Marketing the business.
It’s the administrator’s role to market the business and look for potential buyers. A good insolvency practitioner will create a database of interested parties, so the sale may not be too public or overt. They’ll also make sure the appropriate company value is achieved when it is sold. If no-one is interested, they can sell to the newco.
Step 5: Go into administration.
The company is then placed into administration and the assets sold. This can happen very quickly. A creditors’ meeting will need to be held too, to explain what’s happening. The administrators repay creditors (pro-rata) with funds received from the liquidated assets.
For advice and help with your pre-pack administration process, call 0800 054 6590 to speak to one of our licensed insolvency practitioners, email us at [email protected] or request a call back
Two case studies
Drayton Manor Park confirms sale to Looping Group
Staffordshire-based family attraction Drayton Manor Park was sold in a pre-pack administration to Drayton Manor Resort Limited, which is part of the Looping Group. The new company retained the park’s 599 employees as part of the buy-out, under the same terms and conditions.
The joint administrators were Mike Denny and Peter Dickens of PwC. Mike Denney said: “The Group had been facing exceptionally challenging trading conditions. In February, Storm Dennis forced the Park to close unexpectedly, while its planned reopening in March was delayed due to Covid-19. These factors combined to exacerbate cash-flow pressures on the Group.”
Byron sold to newco owned by Calveton UK Limited
Founded in 2007, Byron is one of the UK’s most well-known casual dining operators with 51 sites across city centres, neighbourhoods, retail and leisure centres and tourist destinations.
Following their appointment, the joint administrators sold the brands and certain assets of the Company in a pre-pack administration to a newco owned by Calveton UK Limited, with the Company’s existing investors taking a minority stake. The deal will allow 20 sites to continue to trade, with 551 employees transferring to the new owner.
Conclusion
Many companies are feeling fragile right now. If the core of your business is strong, please don’t leave it too late to get professional help. Done right, a pre-pack administration can be a seamless process that ensures a business can continue to survive and grow.
For advice and help with your business challenges, call 0800 054 6590 to speak to one of our licensed insolvency practitioners, email us at [email protected] or request a call back