Pre Pack and Phoenixing – Tips to ensure pre pack success
The term Pre Pack liquidation or Phoenixing is used to describe the process where the assets (and often the name) of a business are purchased by a new company. The new company continues to trade without the burden of the old business’ debts. The old business is then normally closed through a liquidation process.
The pre pack process often receives negative press as it can often look as though a new company can start up as a mirror image of the old and simply leave the people who are owed money in the lurch. However, the fact often missed by such arguments is that the original business is already in financial difficulty and likely to fail thus leaving creditors unpaid anyway. The Phoenix process at least gives the opportunity to save part of all of a company, preserving jobs and the potential of trade in the future.
If you are considering using a Pre Pack process to save a failing business, there are a number of areas that you should consider:
Set up the new company
The new company which will ultimately buy the assets of the old should be set up well in advance, a bank account opened and registration for VAT completed. Particularly if the directors of the new company are the same as the old, it is extremely important to register the new company for VAT immediately. In these circumstances, if HM Revenue and Customs learn that they will be a creditor of the old business, they will be unlikely to agreed VAT registration for the new without a substantial deposit and restrictive return arrangements such as calculating and paying returns monthly.
Agree terms of lease with Landlord
If the new business is likely to want to remain in the same premises as the old, agreement must be reached with the landlord regarding the transfer of the lease. A landlord may try and renegotiate the terms of the lease for the new business. It is therefore always sensible to have alternative accommodation options if possible so that the threat of vacating the premises can be used as a bargaining tool.
Arrange to raise the lump sum required to buy the old company assets
The sum required for this purchase will be dependent on an independent market valuation and therefore may be higher than the director’s expect. If finance cannot be made available through a more traditional route such as property equity release or a commercial bank loan, the area of Asset refinancing may be considered. Many asset finance companies will lend against the value of the assets such as plant and machinery to be purchased by the new company as long as they are unencumbered (wholly owned by the old business).
Consider invoice factoring to support the cash flow of the new business
Once the new business is up and running, early cash flow will normally be of prime importance. Given the bank’s current reluctance to lend, methods of supporting cash flow such as a bank overdraft or credit card may well not be available. If this is the case, invoice factoring should be considered which would give immediate access to up to 80% of the value of all new invoices raised by the new business.
Undertaking a business pre pack liquidation is by no means a recipe to ensure that the new phoenix business will be a success. The strategy and business processes of the new company may have to differ significantly from the old business which will require hard work and tough decisions. However, considering the areas above will certainly help to avoid some of the pitfalls of the pre pack process.