Pre-pack administration: what you need to know

In short

pre-pack administration is where the buyer of the business has been agreed before the date of the Administration Order. On the date of administration the business is sold and then the majority of the creditors, shareholders and employees are notified after the event.  Pre-packs were designed to preserve the value of the business by allowing a very quick sale.  The sale must be at a fair market value and is often to the existing directors, lenders or shareholders.

In more detail

When should a pre-pack be considered?

A pre-pack is a very useful way to rescue a business that has a high value of goodwill that would lose value over a short period of time.  A good example of a business that is suitable for a pre-pack is one that relies on employees who have a detailed knowledge of the business and clients and customers who would leave if there was uncertainty.  The overall objective of a pre-pack is to give a better return to creditors than in liquidation.

Benefits

Pre-pack administrations are very quick to implement which can help stop clients or customers leaving. It also makes the change in ownership as seamless as possible. From the first meeting to the completed sale a pre-pack administration can take just two weeks to complete.

In a pre-pack the business is usually valued by an agent who has experience of valuing businesses and the business must also be advertised for sale even if this is for a limited time.

The pre-pack process

When entering a pre-pack you will need to choose a suitably qualified and experienced licensed insolvency practitioner. Your accountant or solicitor should be able to recommend one if you’re unsure. The licensed insolvency practitioner, who is the proposed administrator, will help you through the process. In summary the administrator will:

  • Request a balance sheet (financial snap shot) of your current finances including what you own and what you owe.
  • Request information including; employees details, cash flow projections and reasons why the business has gotten into trouble.
  • Instruct an agent to prepare a sales pack and market the business – this may mean full marketing with adverts in the press or more discreet marketing by just targeting known interested parties.
  • Set a date for best offers and when they come in for the agent to recommend the best one.
  • Instruct a solicitor to prepare a sale agreement unless this was a very small sale.
  • The buyer would normally have solicitors acting for them as well.
  • Usually the insolvency practitioner will talk to the largest creditors by value via telephone before the sale in order to seek their approval (although they cannot block the sale).
  • Once the sale has completed the administrator must write to all creditors within 14 days setting out what has happened and why the pre-pack route was chosen.

This whole process can take from two weeks upwards.

What next?

Have all of your financial information together and make sure that you tell the insolvency practitioner of any impending winding up petitions and county court judgements so that they can deal with them directly.

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