There are many circumstances where a business can be profitable, but find itself insolvent. These are usually unforeseeable circumstances, such as a catastrophic loss of stock, look of a key customer or key staff. In these circumstances it can often be difficult to rescue the business from the current financial difficulties without major action, and one action which can be taken is the pre pack administration.
Pre pack administration is when a buyer is pre-arranged and the business is then placed into administration and bought immediately, allowing the substantial reorganising of finances and allowing the business to continue operating smoothly without the financial burden of the debts. It is important that a pre pack administration is handled properly and only used for the right reasons, it is a recovery tool to assist a profitable business through a rough patch, not a means to save an unprofitable business or avoid the payments of debts. Care must be taken to avoid negative publicity, especially where the business needs to keep trading with the same suppliers and customers.
A pre pack administration is usually a quick and seamless process, with the buyer already in place and sufficient ready cash and assets waiting to fund the business operations in the new form. This gives the injection of fresh capital into the business needed to keep it running. Sometimes the buyer is an external party or an investment company, but sometimes the buyer can be some and all of the existing directors or even staff if they have identified a new funding source sufficient to buy out the business and provide sufficient fresh cash. When considering the funding it is important to keep in mind that the assets of the company will need to be independently valued and then purchased as part of the pre pack administration price, and additional funds will be needed to supply the new operating capital to keep the business running.
A pre pack administration differs from a normal administration only in that the buyer has been agreed before the business is placed into administration. Many businesses placed into administration are sold in exactly the same fashion to investment concerns or business restructuring specialists, although some will be separated and sold as separate parts, and a few will be closed and sold only for their assets, both of these outcomes are less likely if the underlying business is profitable and can be restored to a going concern.
In either case, once you have identified that your business is insolvent you should contact an insolvency practitioner who will be able to advise you if there are options other than putting the business into administration, and will also be able to help identify if there are potential buyers who can be lined up for a pre pack administration or if there are additional funding streams the existing directors could access to allow them to be the buyers for a pre pack administration.
Mark Jefferson is a seasoned commercial finance professional with over 25 years’ experience in financial services, much of that spent providing funding to SMEs. Mark has worked with many other firms in a similar situation to yours. Call Mark on 0800 157 7355 and you can also follow him on Google+
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