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• 25 Jan

  Guide To Pre Pack Finance And Funding

  Welcome to our guide to pre-pack finance and funding to purchase the assets of companies that have entered into Administration.

  If you are looking to raise the finance to support a possible pre-pack Administration, we can help you. Members of our team have arranged this type of funding for clients in the past.

  GET A QUOTE FOR PRE-PACK FINANCE

  Insolvency And Pre-Packs

  

  If you are in a position where you are worried about your company's solvency (becoming insolvent - when you are unable to meet your liabilities as they fall due), you should consult an insolvency practitioner (also called an "IP") as a matter of urgency.

  This is an essential step in the process of arranging a prepack anyway. Failing to act can have negative consequences for the Directors of a failing company. They can become personally liable for the debts of the company if they don't take action.

  What Is Company Administration

  Company Administration is a legal process whereby the running of an insolvent company is taken over by a firm of licenced insolvency practitioners. It gives the company's assets a degree of interim protection from creditors. This process is approved by the UK courts and its purpose is to improve the returns delivered to the company's creditors.

  In some instances, continuing to trade an insolvent company can deliver more value to its creditors than immediate liquidation. For instance, if there is work in progress that can be easily converted to finished products to complete existing orders.

  What Is A Pre-Pack?

  A pre-pack (PP) is negotiated prior to the appointment of the Administrator. It is an agreement for the sale of the failed business, part of the business or its assets to another party. Usually, this will be the directors of the company entering Administration, but it could be another third party. The terms of the sale are pre-agreed. It could involve a one-off purchase price, or there may be a series of payments. These will be remitted to the Administrators with the aim of benefitting the creditors of the failed company.

  The whole purpose of a pre-pack is to improve the return to the creditors. The PP can be completed immediately or after the company enters Administration. This type of arrangement can be referred to as a "phoenix". Literally, a new business rises from the ashes of the old one, like the mythical phoenix.

  See this case study about Factoring For A Phoenix Company.

  For further information about financing acquisitions generally, please see our Guide To Acquisition Finance.

  The Steps Involved With A Pre-pack And Its Financing

  These are the steps involved with establishing a pre-pack and arranging its financing:

  1. The company typically comes under pressure from its creditors, and this triggers the directors to consider taking insolvency advice from an IP. The creditors could include HMRC, the company's landlords or other trade creditors. If the company is likely to be unable to pay its creditors, this can be the catalyst to look at insolvency options. In some cases, it is just the legacy debt that is stopping a business from being able to trade profitably.
     
     
  2. The directors then speak to a licenced insolvency practitioner and go through the options for the business. This is when the possibility of a pre-pack may be raised. This gives the directors a chance to continue trading the business forward (a new business is often formed called the "Newco"), without the pressure of existing debt. The creditors benefit as the directors pay for the opportunity to take this course of action. This can make more money than the liquidation of the company's assets.
     
     
  3. The directors may need to consider if existing suppliers are prepared to support such a venture. They may need to use the existing premises or they may need to ensure continuity of supply for goods and services.
     
     
  4. The directors may need to seek financing in order to fund the purchase from the Administrators. A business finance broker can be useful in assessing and comparing the options that are available.
     
     
  5. If a pre-pack seems feasible, the IP will arrange for an independent valuation of the business or the assets that are to be purchased. This is to ensure that the price is fair value for the creditors. The IP will also want to confirm that the purchasers have the funds in place to be able to complete the purchase. Therefore, it is wise to explore your financing options as early as possible.
     
     
  6. The company is then placed into Administration, a process that involves the courts. This gives the company, and its assets, a degree of protection from its creditors whilst the IP progresses matters. The Administrator will call a meeting of creditors, as part of the process. This meeting will be presented with the pre-pack option.
     
     
  7. If the PP progresses, the payments are made to the Administrators by the purchasers. The agreed assets are transferred to the purchasers. The IP then accounts to the creditors of the failed company using the proceeds of the sale. This may mean significantly more than just liquidating the assets of the company immediately.

  Pre Pack Finance

  A key step in the process above is arranging the pre-pack funding. This could be drawn from various sources. The directors may have their own funds, or they may have friends or family that are prepared to provide support. Whilst traditional banks may be an option, perhaps using a business loan, in some cases, they may not be prepared to deal with prepacked situations. Also, it is often the case that the directors may have developed poor personal credit histories in the run-up to the failure. Therefore, it can be helpful to access financing that does not rely upon your personal credit history.

  Using Invoice Finance To Finance A Prepack

  A lesser-known option is to use invoice finance to finance the pre-pack. This can work in several ways. Firstly, the finance could be used to pay the purchase consideration. It is possible to leverage the book debts of the business that is being acquired, in order to release the capital to buy those assets. Effectively, the financing and the purchase happen simultaneously.

  Furthermore, some forms of invoice finance, such as factoring (funding with credit control), do not focus on the financial circumstances of the applicant. The facility tends to be based on the strength of the book debts that are being funded rather than personal or business credit history. This can be very helpful when financing a pre-pack.

  Working Capital Funding

  Secondly, the funding can be used to meet ongoing working capital needs. As new invoices are raised, new finance is released. This can improve the cash flow of the newco. Once again, this type of finance can be available when options such as a loan are not.

  Please speak to Sean on 03330 113622 to discuss the funding options if you are seeking pre-pack finance.

  By Glenn Blackman