What are the pros and cons of using a 'pre-pack' agreement as part of a business turnaround?

There are many definitions of a business turnaround - is it a return to profit, survival from the brink of insolvency or in fact a business flushed through the insolvency process in a bid to leave behind its debt?

In distressed businesses, a commercial decision needs to be taken as to whether any new funding is to be made to its current entity (which often has heavy outstanding liabilities) or to a new company.

Financiers are under no obligation to put monies into current businesses, but if they are to invest in a new entity then some form of bridge between the two is required.

One mechanism for this is the pre-packaged insolvency process, or 'pre-pack', as it has commonly become known.  Although these have been around for some time, it is only since the 2002 Enterprise Act that they have been regularly used as part of the insolvency process.

In specific circumstances, the principal advantages of a pre-pack are that they offer a speedy resolution to the insolvency process, promoting continuity and loyalty among customers and suppliers, while damage to employee relationships should also be minimised.  A new entity can also buy the name of the previous business, and the administrative costs of the whole process should be lower.

In fact, at its best a pre-pack is an excellent process for consensual, out-of-court restructuring.  It rescues viable businesses and causes a minimum amount of disruption.

At its worst, however, a pre-pack process is a dark art and can be controversial, especially in cases of sales to an existing management team.  There have been suggestions that the process is open to abuse by office holders, that there is a lack of objectivity and that pre-packs do not give enough time to either effectively value or properly market the business.  It can also leave creditors disenfranchised.

However, uncertainties can be overcome through effective communication and through office holders operating objectively and transparently, gaining proper valuations from reputable valuers.  They must also be able to justify their actions to their regulatory authority.

If used in the right way, a pre-packaged disposal provides an efficient rescue tool because it is fast, fair and focused on rescuing value.

However, a refinancing on its own will not provide the necessary solution, and some form of management change - whether this is merely augmenting an existing management team or replacing it - will also be necessary.  This is where the skills of experienced advisors are needed.

David Hole

Alexander Business Consulting