If your business is heading for insolvency and you can’t see a way out of the debt, pre-pack administration could be the solution you need.
Prepack administration isn’t suitable for everyone but if the underlying business is fundamentally sound, it could provide an alternative to consider.
We take a look at how pre-pack administration works and how it could rejuvenate a failing business.
Pre-pack administration is certainly worth talking about
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Who qualifies for pre-pack administration?
If your business is insolvent, or irrevocably heading towards it, it’s always better to call in the experts sooner rather than later. Early intervention allows more options to be considered which could be ruled out if help isn’t sought until later.
There are many reasons why a business can fall into financial difficulty and it doesn’t always mean that the underlying structure is flawed. It can only take a default from some big customers to create a spiral of debt from which it’s difficult to escape.
If the business just needs some help to escape from temporary problems, pre-pack administration could provide a positive solution.
In order for pre-pack administration to proceed, there must be a buyer lined up before the process is started, and they must be able to purchase the assets as well as have cash flow to run the business.
How does pre-pack administration work in practice?
Unlike ‘full’administration, pre-pack administration can only go ahead if there is a buyer – or buyers – ready to step in and take control of the business.
These new owners can either be unconnected with the failing business, or they can be the directors ready to inject cash to start afresh.
The idea of pre-pack administration is that the process is seamless, winding up the old business and launching the new one without pausing for breath. This allows operations to continue uninterrupted and shouldn’t be detrimental to the daily functions and provision of goods or services.
What are the benefits of pre-pack administration?
Opting to go for pre-pack administration may sound like a catastrophic decision but it could actually be the thing that saves a business.
Although a cash injection needs to be found in order to purchase the assets and then cover the ongoing costs, it does mean that the business can continue free of past debts.
Prepack administration creates a ‘new’company even though many things may effectively remain unchanged. It does however offer the chance to attract new investment, free from the financial commitments that the existing business may have come with.
Avoid having to close down the business with pre-pack administration
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For employees and staff working for the company, a pre-pack administration safeguards jobs and protects future job security too.
It is however essential that care is taken to properly structure the pre-pack administration so that it’s clear that a new company has been created. If this isn’t done, it can appear as if the restructure is simply an effort to escape onerous financial commitment and could be detrimental to the company’s reputation.
Pre-pack administration is essentially a way of restructuring company finances, wiping out debt baggage where there is no realistic chance of repayment. The new owners of the company won’t be able to pick it up ‘on the cheap’as it will be independently valued and a fair price must be paid.
However, providing a fresh injection of cash can be found, pre-pack administration can be the solution which can allow a previously profitable company to shrug off a temporary problem and resume operations as before.
Of course, the dependence which led to the financial collapse should be addressed in the restructure to try and prevent a recurrence in the future. Identifying vulnerabilities and putting measures in place to spread the load more evenly is a core principle of a good restructuring proposal.
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