Pre-packs: what's the deal?

Shortly after the birth of the Enterprise Act 2002, administration became the gateway to corporate insolvencies. Now, with the num-ber of failing businesses soaring, pre-packs have begun to attract criticism from creditors left unpaid when failing pubs have been sold back to the owners who ran them into the ground in the first place. Some experts say, however, that sometimes a pre-pack is the only option.

For those trying to rescue a business, concerns usually evolve around maintaining the value of the company in terms of keeping customers, ensuring continuity of supply and of course, keeping key staff. For those reasons, acting quickly can be essential. In comes the pre-pack process, under which an administrator is appointed and the business is sold almost immediately after — often back to the existing management or directors with a clean slate. Sounds like a good idea?

Not everyone would agree and these so-called "phoenix companies" have been criticised for representing a win for insolvency practitioners and directors who have pushed through a quick deal, while those owed money leave with nothing. Of course you can understand why, since one day the business is failing and the next it is a new company, with a new name and no liabilities — essentially run by the same people. However, the alternative — keeping the business going for three to six months while trying to find a more suitable buyer — may simply delay the inevitable and rack up more debt.

The decision to keep the enterprise going at a time where few people are spending and margins are getting squeezed is financially difficult and perhaps even more damaging. If the business isn't making a profit, the end result will almost certainly be administration or an even higher level of debt.

There are also personal liability issues for owners who continue trading once a business is insolvent. With professional, independent advice, it is often possible to save a business experiencing financial difficulties, thus safeguarding jobs, the business and maximising returns for creditors.

A very real scenario for many hoteliers and licensees is that they have paid a premium for their venues a few years back, but are now struggling to cover the interest due to falling sales. The banks normally take their monthly payments from the overdraft facility, which often leaves the Crown as a large creditor for outstanding PAYE and VAT.

The reality for a large number of businesses in the hospitality industry is that their assets have been refinanced to their limits based on optimistic values done in better times. There are often very few options available and if the choice is between liquidation and closure or a pre-pack deal, via an administration, then it is certainly worth considering. In this market, one offer (although perhaps not the most attractive one on the face of it) is better than none at all.

Of course it would be preferable to sell a struggling pub, but that simply isn't on the table in most cases and the choice is between a sale to management or closure. For those now thinking that a pre-pack sounds like a great idea here is how it works. To secure a pre-pack sale, the finance for the purchase needs to be raised and personally guaranteed by the owner or director of the business. A detailed business plan supported by solid forecasts that sets out the rationale for the pre-pack is also required and you need to appoint a professional administrator to prepare the report and manage the process with the bank.

While certain banks are sceptical about allowing pre-packs to parties involved in the original company, the increase in visibility over the past few months will be changing attitudes fast. Following a pre-pack sale, the key is for the owner or manager to learn a lesson about why the business failed in the first place and restructure.

Otherwise, they will be in the same situation 12 months down the line.

A fresh start is a chance to manage creditors properly. If you think payments are not going to be made in time for the prescribed due date, then speak to your creditors and arrange a revised payment plan. Review costs and overheads, and if your staff have joined you in the new business, communicate with them honestly about the reasons for the pre-pack and communicate to them that increased effort and commitment will be required to survive.

Identifying the essential components to your business's success and excluding unnecessary costs will ensure money is not wasted. Likewise, if you see trouble approaching again, being ready to seek advice instead of burying your head in the sand will give you a head start.

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