Bad debts, falling sales, cash flow problems – are you running a business?
If your company is facing serious financial difficulty you may have heard of (and be worried about) “trading whilst insolvent”. It’s a complex subject about which there are many myths and rumours circulating. And there are very serious consequences of continuing to trade when you know your business is insolvent.
Is a “pre-pack” the answer? Well, it’s not quite as simple as that. Due to Pre-pack administration attracting much attention in the media. But it is only one of a number of insolvency procedures available to struggling companies. Every business and situation is unique, and it may not be the most appropriate for your company.
How does it work? A pre-pack is where a buyer is lined up for an insolvent company’s business (or assets) before it goes into a formal insolvency process. It allows an administrator to quickly and confidentially sell a failing business before it is permanently damaged.
Invariably, whilst potential purchasers are approached in advance and valuation exercises performed, little open marketing of the business is carried out. It can be sold to anybody but it is often existing management who are in the best position to move rapidly as little or no due diligence is required.
Critics often dislike the concept of existing management buying back the business, continuing to trade clear of the original debts in a new “phoenix” company. Unsecured creditors kept in the dark are understandably often suspicious of the pre-pack procedure.
However, pre-packs can be invaluable in keeping a business trading, saving jobs and providing a better return for some creditors when compared to liquidation. Additionally, it enables the business to survive and retain some goodwill value.