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:
Pros
- 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.
Cons
- 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.
Winding Up Business 