We’ve all heard of the various methods by which insolvency or a financial crisis can be solved; however, a smart entrepreneur will not only study them but also meticulously scrutinize every detail to better weigh the options. After all, the decision one makes can either make or break the business. It’s a tough job and one that’s utterly sensitive. This is why today we’ll help examine one of the more popular methods called the Pre Pack Administration.
Also referred to as a pre-pack, it is a legal and powerful tool that allows a viable but financially troubled company to sell a part of or its entire business to a trade buyer or third party and in some cases to one of its existing directors where it shall continue to operate under a new name. In essence, it is a transfer and restructuring approach.
Like any other option, it has its own set of pros and cons as follows:
- It permits operation fluidity. Operations go on as is and there is very little to no amount of interruption allowing the business to continue trading as should be.
- There is business continuity. With a pre-pack, the entity continues to live even if it shall operate under new management and under a new name. It fosters the going concern principle.
- The entity’s value is upheld. Before the insolvency reaches the general public, the use of the method allows for the company’ value to be held intact. Little to no decline shall be seen which is good especially that the entity is aiming to bounce back.
- Employment is preserved. Unlike liquidation, the pre pack administration saves jobs. The former comes with cost-cuts and job cuts and even a full on layoff. The latter on the other hand does not and any amount of layoff, if any, is minimal and pertains only to redundant positions.
- There lies a possible undervaluation. Due to timing constraints, there might not be ample time to market the sale which may lead to owners selling the assets for lesser than they intend or want to. This, however, is avoidable given the right strategies.
- A pre pack administration comes with misconceptions. Despite its popularity among organizations, a pre-pack isn’t very common in the ears of the public resulting to various misconceptions about it. To some, using the method abuses the chance to write off certain debts as well as the lack of transparency.
For most people, the general public in particular, liquidating a company is almost always associated with poor profits and losses. That is true to some degree but not all business entities that undergo such procedure do so because of financial distress. There is also this thing we call the Member’s Voluntary Liquidation or MVL.
The MVL pertains to the liquidation of a solvent firm’s assets by virtue of a resolution passed by its board of directors to voluntarily wind up the business affairs. It is important to take note that this is not an insolvency procedure and must therefore be accompanied by a statutory declaration of solvency by the firm’s board of directors as it is considered a criminal offense to do so otherwise. The court or the creditors will not be able to force anything unto the company. The shareholders will have the power to choose a liquidator to manage all affairs and procedures necessary.
All assets will be liquidated with proceeds to be distributed to all parties with interest or share in the business. All creditors must first be paid in full before any amount is given to owners and shareholders. In the event that the entity’s assets is not sufficient enough to cover its obligations to its creditors, the Member’s Voluntary Liquidation will be deemed invalid and creditors can now go for a forced liquidation procedure.
Now, you might be wondering what valid reasons are there that will make an MVL reasonable. Why in the world will a solvent company want to wind up its affairs?
Firstly, there will come a point when owners will want to retire. Of course, we all want to enjoy the fruits of our labor in our old age. Since, the business and its owners are two separate and distinct entities in the eyes of the law, the former must be liquidated in order to transfer its assets to the latter’s personal accounts.
Another scenario is where an organization does not have a qualified and willing heir or successor. Other than leave it to somebody who’s incapable and who will only lead to its demise, it would be more reasonable to wind up and redistribute or even reinvest in other ventures.
Lastly, a Member’s Voluntary Liquidation or MVL may also be called for where a risk becomes imminent and threatens the company’s liquidity and profitability. To avoid the losses, liquidation becomes an option. It would be better to do so now when profits still abound than when all you can declare are losses.
The manufacturing industry is a huge part of the business market. There is a lot to manufacture from food to clothes to shoes to phones to computers to appliances to furniture and many more. It is a well know fact however that many of businesses today under such umbrella often simply come and go. They open shop and then later on close. Not everyone gets to stay and live for long. With business comes risk and risk translates to losses and plummeting finances. What is there to do when such things occur? If losses rear its ugly head, what can you do? The answer is to take a look at the business recovery options available and pick one that suits to solve and fix the problem. Listed below are some of these.
- Factoring or Receivables Financing is one way to do it especially if insolvency isn’t the case and should the company be suffering from troubled cash flows, low cash and high receivables. There is nothing exactly wrong with having a huge level of trade receivables except if they keep most of your cash locked up for prolonged periods. Factoring or receivables financing allows entities to advance the cash locked up in the receivables and customer invoices even before such have been paid by owing customers allowing it to be used for operations and other necessities deemed fit. Additionally it helps better cash flows, reduces bad debts and improves the cash levels of your financial statements.
- The Company Voluntary Arrangement allows the company to continue operations under the agreement that it will repay what it owes to its creditors over a fixed period of time. Such has to be agreed upon by at least seventy five percent of the creditors. The catch however is that the scheduled payments have to be fulfilled otherwise creditors can put you up for a forced winding up procedure. The good thing about this is that it allows the entity to re-organize, reboot and revive its operations on a breathing period.
- The Pre-pack Administration is a popular restructuring solution that allows the entire business or part of it to be sold to a third party and operate under a new name. It gives creditors a much better return as opposed to liquidating the company. Additionally, going concern is strengthened. However, it should be noted that not all companies may take on a pre-pack administration. Certain qualifications must be met first and one of them is insolvency. Losses alone would not cut it.
These are only three of the many business recovery options available. It would be best to consult your adviser or a professional practitioner to get more sound advice tailor fit to your needs.
Winding up procedures is a process undertaken by companies who wish to put their business operations to a close. This is done for many different reasons such as the inability to pay off creditors, change and loss of market’s interest, depleted demand and for some the absence of heirs or simply retirement. For whatever purpose winding up your business has its cons or so called disadvantages. Here is a list of them.
1. You will lose the power at managing and having control over corporate assets since once a liquidator has been appointed he or she will take care of the entire process from sales to distribution. You cannot anymore dispose them.
2. The period of time given for you to resume operations will not be for profit purposes or personal gain but rather only for the completion of the procedures in winding things up.
3. The court order (compulsory) also serves as a letter of dismissal to all employees except those which are bound to a fixed term contract which requires a period of notice for the enforcement in which case such employee is entitled to a sum for damages.
4. If you own or are part of any other business whether in an industry related to or not to the one you are winding up, it can cause some harm from a minor scratch to a solid blow.
Now there too are advantages to such procedure as opposed to other forms of its kind:
1. It is beneficial for business owners whose purpose is not due to insolvency.
2. It is a formal and official manner in which everyone gets their fair share and interest to the company (i.e. creditors, owners, shareholders, etcetera)
3. It will only take a few months to finish which will not be a burden to all parties involved.
4. It formally puts a company to a close.
Now the question is whether you should or should not wind up your operations. Should you do it voluntarily? Are the warning signs what you think they are? To better have a decision that will fit your situation and benefit you best, it is advisable that you talk to your consultant and adviser or some other expert who knows and expertise in such affairs.
Remember that putting a close to your business does not only affect your won interests. It deals with a lot of other people too.