Geoff Newton: Pre-packs do have plus points

It seems that these days, whenever a business gets into difficulties it is all too easy to go to an insolvency practitioner, put the business into administration, hit the Crown, creditors, landlords, banks and anyone else along the way, and then emerge the following day with a new company that starts trading again, often with the same suppliers, as if nothing has ever happened.

During this process there are often genuine concerns about maintaining value - both for existing creditors and for potential purchasers trying to restart the business. Continuity of supply is paramount to keeping customers happy, as without beer you have no pub; key employees must be retained; and current contracts need support to avoid possible claims for breach.

Working in the sector with a number of operators I can see the appeal of this route. Advocates will say that it protects jobs and keeps the best pubs open and trading, which has to be positive for the industry. Detractors will say it is immoral, that the owners of the business should not be able to wipe the slate clean and start again. Instead they should be punished for their lack of business acumen.

Most observers have a balanced view of the impact on the Crown (what's a few more million when national debt rose by £4.3bn in January 2010 to £848bn?) and on landlords who have had it too good for too long and are often unwilling to reduce rents, alter leases and offer support during recessionary periods.

Creditors can be less understanding. They may perceive that assets may have been sold undervalued or that goodwill has not been fully valued because of the speed of the sale.

What critics often forget are the statutory and practical limitations under which the administrator has to act. Given the close-knit nature of the pub industry and the relatively small number of high quality suppliers, keeping your creditors sweet is seen as a key discipline. Retaining the support and credit terms of important food and beverage suppliers through this process is vital if the business is to survive going forward.

And what about the bankers? They generally don't like pre-packs. They don't like to be seen to be supporting a business that in their opinion has failed, often as a result of their own avaricious historic lending practices.

But sometimes they have no alternative. Breaking up a business in 2010 and trying to sell off freehold and leasehold assets is time-consuming and costly. Shutting units damages reputations and once reopened restoring trade can take months. The vultures usually swarm all over the "disposal list" and make very low offers. The administrator, under pressure, is often forced to give sites away just to realise some monies.

It is not surprising, therefore, that nine times out of 10 it's the existing owner who appears with a new or existing funder and manages to secure the return of their core estate, sometimes with less debt and premium sites.

From my experience, pre-packs do have a number of plus points, as long communication and management of expectations among those involved is effective.

Marketing of the business still needs to be undertaken even if a sale back to the current directors is the only likely outcome and whilst industry advice may help enhance the final sale price, certainty of result and reduced professional fees often mean that a pre-pack solution can be recommended.

I am sure we have not seen the last of these administrations and I suspect they will be with us for many years to come.

Geoff Newton is managing director of GN Solutions Ltd​