The Advantages and Disadvantages of Pre-Pack Administration
In recent times, many businesses have found it difficult to keep financially afloat, especially smaller companies. With further tough times to come, many are facing closure or bankruptcy. However, there are ways to deal with business debt, no matter how big or small the problem.
One mistake that many companies make when in debt is failing to seek professional help. Advisors are well equipped to negotiate with creditors and arrange deals that may just save a business. However, not every company can be saved, but depending on the circumstances, further trading may be feasible.
A pre-pack administration process is where the director or directors of an insolvent company buy its assets and trades in their place. The failed business eventually becomes liquidated, ultimately eliminating all debt. The funds that would have been used to attempt to bring the old, failing business back into the black are used to set up the new company and acquire the assets.
Creditors do not favour this process as it is one of the few debt management plans that does not require their approval or agreement. The theory behind the process is that the quicker a sale is determined, the better the price. However, this is rarely the case and many creditors lose out over delayed and lengthy sales, ultimately reducing the price of the business and thus their re-payment.
- Minimum disruption
When a company is in administration, assets tend to be bought by a variety of business which, ultimately, damages a business’s core and identity. Pre-pack administration allows for minimal disruption and, in most cases, few changes will be identifiable.
- Brand identity
Pre-pack administration allows for the new company that has been formed to take advantage of the failed company’s brand identity and value. None of this is lost in administration.
- Guaranteed custom and trade
Relationships with existing customers, clients and suppliers will not change. Couple that with the fact that they are all now presented with a sustainable company, instead of a failing one, and long lasting business relationships can blossom.
- Domino effect
One controversial factor of phoenixing is that if creditors fail to receive all or some of their money back, other businesses are going to fail as a result.
If it was well publicised or documented that the previous company was experiencing financial difficulty then it could work against the new business.