Pre-packs aren't all bad
Article Date: Jun 08 2009
David Moore, Begbies Traynor
Pre-pack deals, in which a buyer is lined up before a struggling business goes into administration, have been given a bad press of late. David Moore, a partner at business recovery firm Begbies Traynor, argues that this is unjustified.
With the number of failing businesses soaring, suppliers have grown increasingly unsympathetic towards pre-pack administrations because they are often left with outstanding invoices for which they will never get paid. The inference tends to be that all directors who do pre-packs are crooks seeking an easy way out of their troubles rather than facing up to their responsibilities.
Such feelings of frustration are understandable, but pre-packs themselves are not the problem. Whether the failed business is sold via a pre-pack or not, and whether the buyer is the existing management team or a completely independent third party, creditors are still left with nothing. It might be little consolation, but so is the owner, since insolvency implies that all equity in the company is underwater.
In business, sometimes things just happen: recessions, bad debts and production problems. Even if there was the odd bad business decision, this is no hanging offence. Sometimes there is simply no other choice than to put the company into administration. Many pre-packs allow the company to retain its customers and suppliers, giving it the chance to salvage those relationships rather than crying over spilt milk.
On the surface, creating a so-called ‘phoenix company’ through a pre-pack can appear to be a quick win for insolvency practitioners and directors. But the alternative – sustaining the business for three to six months while trying to find a more suitable buyer – may simply delay the inevitable and rack up more debt. Keeping the enterprise going at a time where few people are spending and margins are getting squeezed is financially a difficult and perhaps damaging decision. It’s better, surely, to protect the value of the company by retaining customers, ensuring continuity of supply, and keeping key staff on board. The pre-pack process ensures just that.
Fair summary, especially with intensity of 2009 and the ensuant pressures on smaller businesses. However, I wouldn't underestimate the effort needed to maintain supply from damaged creditors. Some premium will be needed to "compensate" the pain of the past. Or a resourcing exercise will be needed and that's intense!! Be prepared!
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