A pre-pack Administration sale is a way for the Administrator of a company to sell a business on to a third party or to the existing directors operating under a new company, in a process where valuations, marketing and the terms of a sale have been largely agreed in advance of the company actually entering Administration. The sale is then completed immediately, or very quickly, after the company enters Administration. This can be an invaluable tool to enable the business to continue trading whilst achieving the best price to be obtained for the business and assets.
After the Insolvency Practitioner has reviewed the company’s affairs and the valuation of the company’s assets, and if it is decided that a pre pack may provide the best outcome for the company’s creditors, a marketing exercise would normally be undertaken that would allow the best price for the business to be obtained. Generally, the Insolvency Practitioner’s duty is to obtain the highest price possible for the business, which can include an offer put forward by the current directors or shareholders and may also include some element of deferred consideration, where not all sums are paid up front.
The Insolvency Practitioner will generate interest and invite offers for the business and when a buyer has been agreed, the terms of the sale are agreed prior to the appointment of the Insolvency Practitioner. Then the sale of the business and assets is completed to the buyer shortly after the Administrator’s appointment. The company’s debts, onerous contracts, and in some cases employee liabilities will remain with the company, allowing the purchaser to continue trading the business without the historic debt.
There is therefore no interruption to the business, which itself can destroy value. There can be negative publicity associated with a pre-pack, however the procedure is heavily regulated to ensure that the creditors of the company get the best possible outcome. Pre-packs are particularly useful with companies that have large intangible assets, as the value of these assets are generally negatively affected at the start of an insolvency procedure. A big advantage of a pre-pack is that the cost of the process is generally lower, as it can be expensive for an Administrator to trade a business over the course of a few days or weeks whilst a marketing process takes place.