
Insight
Scope of this article
This article sets out what a pre-pack is, and why pre-packs remain a very popular mechanism of selling or buying a financially distressed business.
What is a “pre-pack”?
The term “pre-pack” is used, in the context of administration, to describe the process through which a company is put into administration and its business or assets (or both) immediately sold by the administrator under a sale that was arranged before the administrator was appointed.
Pre-packs are not a new restructuring strategy but their use has become fairly widespread.
Often a pre-pack involves the sale of a company’s business on a going concern basis. However, sometimes a pre-pack will just involve the sale of some or all of the assets of the company. The rest of the company’s assets or the business may be sold off in a separate transaction, or the company may be put into liquidation.
They are fast paced transactions, often completing in a few days of instructing lawyers.
Advantages of a pre-pack
The advantages of a pre-pack strategy depend on the individual specific circumstances, but can include the following:
Disadvantages of pre-packs
The main criticisms of pre-packs are:
Practical advice
Pre-packs have been, and remain, a subject of some controversy – but they are still popular and widely used in the UK.
The burden is on the buyer to take what steps it can to expand on the limited information contained in the sales brochure prepared by the Administrators. It is on the basis of that information, and its own investigations, that the buyer will be able to calculate the price it is prepared to pay for the assets and business offered for sale. It is often the case that the information the buyer subsequently discovers, is so significant that it seeks to alter the price that it has already offered during the course of the pre-pack transaction.
The advice to a buyer in this situation is to seek to undertake as much due diligence as is commercially possible in a time pressured environment and to understand the nature of what they are buying and the risks involved. The price is generally lower than full market value, to reflect the distressed nature of the business and the inherent risk of buying assets in a few days rather than several months.
The Corporate team at Thomson Snell & Passmore has many years of experience of acting for commercial clients who wish to acquire financially distressed businesses from Administrators in a pre-pack sale as part of their growth strategy, where negotiation of the sale takes place before the seller enters into administration and the deal completes on or shortly after the appointment of Administrators.
For further advice and assistance in connection with pre-packs please contact Joanne Gallagher, Head of Corporate & Commercial, email: joanne.gallagher@ts-p.co.uk