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How can a Pre Pack save my business?

Pre pack administration could be used to turn your business around if it is failing under the weight of debt. Historic debt is written off while keeping business assets together and avoiding disruption to employees or clients.

Pre pack administration (or Phoenixing) is becoming more and more popular as a way of rescuing a failing company. The process involves setting up a new limited company which then buys the assets of the old business.

The assets, employees and even company names are transferred to the new company which starts to trade as normal and the old business is normally then liquidated.

A pre pack administration has significant advantages over other company rescue solutions.

Historic debt is left with the old business in pre pack

The new pre pack business can start trading without having to pay back the historic debt of the old company. Unlike a company voluntary arrangement, the new business does not have the burden of this debt and can therefore start to trade profitably.

If the old business was struggling with lease property which was no longer required or unfavourable lease terms, the new company has the opportunity to find more suitable premises or renegotiate with the landlord.

The pre pack process also means that the company's business assets and employees are keep together. If key assets or teams are broken up as is often the case in an administration process, a business is not able to continue successfully even if it no longer has to contend with its debt.

Despite these advantages, there are of course a number of things that need to be considered very carefully before the decision to undertake pre pack administration is taken.

Up front investment is required for pre pack

A lump sum of money will be required with which to buy the assets of the old business. The amount will depend on the valuation of the assets including work in progress and goodwill. However as an absolutely minimum, the value will normally need to be £15,000.

The amount required to by the old company assets is generally raised by the directors or external investors of the new business. However, to make the transaction possible, the sum could be paid to the administrator of the old business over a period of time (perhaps 6 months).

In addition to the sum required to buy the old business assets, when considering their budgets, the new business owners and directors will also have to factor in working capital for the new business.

A common misconception of the pre pack process is that it can be used to reorganise staff. This is actually not the case. Under European employment law (TUPE), staff employed by a company which is bought by another must be transferred to the new business under the same terms and conditions.

Generally transferring staff to the new company is not an issue as it needs the old staff to operate. However, where any staff members are no longer required, they must be made redundant by the new company taking account of their full employment rights. If not, they may have a claim for unfair dismissal.

In many instances, pre pack administration is a very good way of saving a business as historic debt is written off and unfavourable lease agreements can be re-negotiated. However, to work successfully, a pre pack will normally require significant upfront investment and will need to take account of employment law. As such, expert advice must be sought before deciding to proceed with a pre pack solution.

If your business is in financial difficulty why not talk to us about possible solutions such as http://coopermatthews.com/phoenixing.html

Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.

Cooper Matthews specialise in Business Recovery Services Advice providing straight forward insolvency advice for businesses in difficulty and business owners with personal financial problems. They have significant experience in working with small to medium sized businesses.

Prior to Cooper Matthews Derek Cooper was the Managing Director of Wilson Philips specialising in personal insolvency and financial restructuring. He previously worked for 11 years as a financial advisor for Allied Dunbar, and later the J Rothschild Partnership. Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic environment.

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