The economic climate has affected many businesses across the globe; some more than others. Whilst most will attempt to implement a debt management plan and come to an agreement with creditors, others will consider pre pack administration. This process consists of selling the assets of a failing company once it has entered administration and starting a new business in its place. More often than not, directors of the failed business, which is then liquidated, will be the ones who purchase these assets.
With any debt management plan or process, there are advantages and disadvantages. In most cases, phoenixing can be an incredibly sensible way to keep a business, brand and spirit alive.
The Advantages of Pre Pack Administration
One of the main advantages of this type of insolvency plan is that the brand of the business is relatively unharmed. Over time a company’s brand and identity will grow and strengthen if trading and business has been relatively successful. With pre pack administration all trading can continue with the added benefit of previous brand value.
Job Security for Employees
Existing employees and members of staff will not be highly affected by the on goings of the procedure. Redundancies and staff cuts will be kept to a minimum and, in the majority of cases, teams and staff structure can be kept intact.
Use of Existing Relationships
Relationships between businesses and clients or suppliers are incredibly important for the success of an organisation. If a trusting relationship has manifested as a result of previous trading then there is no reason why these shouldn’t continue with the new business.
Although this information may glorify the process, there are certain implications to the system. As with any debt management plan, a thorough investigation needs to be conducted prior to an agreement to weigh up the pros and cons of each option. Phoenixing is no different and it is important to remember that entering into a process such as this can have its implications.
The Disadvantages of Pre Pack Administration
The Domino Effect of Debt
The fact that many creditors are left empty handed, due to a poor sale, leaves many other businesses struggling. Creditors will put added pressure onto those who could realistically pay back their debt.
In many cases, the failing of a business is well documented in the media, especially amongst business publications. Depending on the business type, this could lead to a decline in sales and client interest.
The recession has hit both businesses and families hard. However, it is important to remember that companies are not struggling to gain a profit, simply struggling to sell as much to the financially affected public. This particular scenario can lead to reduced pricing which, ultimately results in poor sales. Pre pack administration is a realistic and worthwhile process for many companies who are experiencing business debt, however gaining professional advice from an insolvency advisor is highly recommended before decisions regarding debt management plans are made.
About the Author: This is a blog post by Nicola Winters on behalf of Cooper Matthews who provide insolvency advice to struggling businesses. Click here for more information on pre pack administration.