Pre pack administration: Pros and cons

Pre pack administration is the process that businesses facing financial difficulty can enter into to close their insolvent business and complete a packaged sale of their business or assets. It includes the sale of the business and its assets to a pre-agreed buyer as soon as the administrator is appointed. 

As a process that can help a struggling business turn things around, pre pack administration can deliver many advantages, but there are also some disadvantages that you should consider before beginning the process. 

In this article, we take a closer look at the pros and cons of pre pack administration, so you can make a more informed decision about whether it’s the best course of action for you and your business. 

The pros of pre pack administration

There are several pros of pre pack administration, including:

1. It enables business continuity: Due to the nature of the quick sale, the business can continue to trade with little disruption. This makes it a smooth process for customers, suppliers and employees.

2. Employees’ jobs are saved: When a business enters pre pack administration, staff are often transferred over to the new company under the same contracts. This can help give reassurance and job security, to employees at what can be a stressful and worrying time.

3. It can protect your brand and reputation: Pre pack administration can keep things running so smoothly that customers may not even notice a change of ownership. This can protect a business’s brand and reputation.

4. Quicker sale: A pre pack administration can help avoid the need to delay a sale whilst a period of open marketing is completed, therefore speeding up the sale process.

5. It provides the business with a fresh start: When a business takes the pre pack administration route, it can easily move forward without the burden of past debts holding it back.

6. Rescue or better returns: As all administrations must achieve one of the set objectives of rescuing the company as a going concern or better returns to creditors (than the alternative processes), when a company goes into Liquidation, these objectives should have been achieved or the administration will fail.

The cons of a pre pack administration

While there are many pros, it’s essential that you also consider the cons of pre pack administration. These include:

1. Little transparency: A pre pack administration often happens quickly and behind closed doors, which can leave creditors feeling left out of the process. Often, creditors may only find out about the sale once it’s taken place, which can lead to feelings of mistrust.

2. It can be perceived as unfair: Typically, the buyer of the business is often someone already connected to the business, such as a director, the management, or a group of shareholders, which can be perceived as unfair to creditors.

3. Reputational risks for the new company: Although it can protect your brand and reputation, it can also have the opposite effect with some customers, suppliers or investors feeling uneasy about dealing with a business that’s just gone through pre pack administration.

4. It can be unclear if a fair price was achieved: As the buyer is pre-agreed and the business isn’t marketed in the usual way, it can be unclear whether a fair (or the best price) was achieved. This can lead to criticism from creditors and investors.

5. Issues may still be present: If the issues that led to the Company’s financial difficulties aren’t addressed properly, they could cause problems for the new company. Therefore, it’s vital that the new owners implement the necessary changes to turn the business around.

6. All administration types are considered to be a greater costs than the alternative insolvency processes (such as Liquidation) as they are a court driven process which requires the approval of a judge and a greater level of paperwork to consult with creditors and the pre-pack pool (to consent to sales). Therefore, the return to creditors, after the administration fees are drawn are often no better than the alternative processes despite the need to achieve the objectives of a rescue or better returns.

Is pre pack administration right for your business?

If your business is facing financial difficulty, there are many solutions available to you, and the sooner you recognise the issues and take action, the more options you will have available to you. These pros and cons should help you understand the process more clearly, enabling you to make a more informed decision about the future of your business.

Want advice on pre pack administration?

If you would like to learn more about pre pack administration or would like some free, impartial advice on whether pre pack administration could be suitable for your situation, then please contact the team at Bridge Newland.

Categorised in: Administration News