To pre-pack or not to pre-pack, that is the question

Peter Cox discusses the advantages and disadvantages of a pre-pack deal

A ‘pre-pack’ admin is when directors of an insolvent company prepare a sale of all or part of the business or assets before an administrator is appointed, but often with their support.

The negotiated, pre-arranged sale occurs immediately, or shortly after, the appointment of the administrator. They’re increasingly common, and a quick Google search will find many companies advertising such services and touting pre-packs to failing businesses.

How you feel about a particular pre-pack depends on who you are. Secured creditors have to be informed about the company’s plans, are more likely to be involved in the new business and pre-packs consequently can appear biased in their favour.

Unsecured creditors presented with a fait accompli often feel aggrieved that they have been denied a vote on the proposed sale of the business or assets. They feel a pre-pack fails to expose the business to competitive market forces, and, as such, best value for them is denied.

Now, while there is evidence that jobs can be saved by acting quickly and minimising damage with a pre-pack, and, on average, secured creditors also do better, unsecured creditors are normally worse off.

The more contentious forms of pre-pack are those where directors of the failing company set up a new ‘phoenix’ business, often with the same owners in charge. The new company buys the assets of the old business, often retaining suppliers and customers with whom continuity of trading can be achieved, but is able to leave debts and other things (such as unfavourable lease agreements or contracts) in the old company. This is then liquidated.

It is completely understandable that creditors, particularly those who are unsecured, feel very aggrieved to see the directors they hold responsible for their losses ‘swanning off’ and able to start again with mess and consequences behind them.

The use of pre-packs has grown significantly over recent years, and they have courted more controversy than any other form of insolvency practice. The government has very recently reviewed the practice of pre-packs, but has not brought any new measures in to regulate the practice despite heavy pressure from some quarters.In January 2009 the government did act and introduced a new process, the Statement of Insolvency Practice 16 (SIP 16), to try and combat some of the criticisms surrounding pre-packs and add transparency.

It requires Insolvency Practitioners (IP) to detail and make available to creditors and government ‘sufficient’ information on the decision-making process to allow them to understand the circumstances under which a pre-pack was considered the best option.

It also requires the IP to lay out the relationships and connections between the old company and the new phoenix. Judging by the on-going criticisms pre-packs attract, it’s fair to say there is some way to go in gaining support for this approach to failing businesses.

It is clear that there is nothing illegal in a properly administered pre-pack, but many see them as morally wrong. There will always be victims in a business failure, but in a pre-pack those most responsible can often walk away least affected.

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The cost of motorsport in tyres, fuel and fluids

The cost of motorsport in tyres, fuel and fluids

Liqui Moly has sponsored Team Engstler for years

Liqui Moly has sponsored Team Engstler for years

As you’ll see in the latest issue of CAT Magazine I was recently a guest of Team Engstler sponsor Liqui Moly at the latest round of the World Touring Car Championship in Hungary.

Aside from the sheer spectacle of a WTCC event, I was surprised at just how geared up for the race the locals were. Every other radio or TV advert was devoted to the action and the Hungaroring itself was near overflowing with spectators.

It must be a humbling experience for the 25 men and women who make up the team. As a private enterprise, it’s difficult for Team Engstler to compete with the manufacturer works teams – but that doesn’t stop the team putting everything it has into each and every race.

A team of 15 mechanics services the team’s two cars at each race, spending weeks on end away from home. In fact, during a single season the cars will travel twice around the globe to get from race to race, mostly by plane.

Fuel? That’s particularly expensive. It was €5,80 per liter in Hungary, and the team will use 4000 litres of it during the season. Add in the 370 litres of lubricants used, the 400 tyres needed and the ten tones of equipment and materials carried to each race and you see the scale of the operation.

Add up the costs of all those materials and it’s easy to see why sponsorship is such an important factor in motorsport of any kind. Team Engstler has been partnered with Liqui Moly off and on since the late 1980’s – with the relationship growing each time the two come together for a new venture.

You can read more about my adventure in Hungary in the May issue of CAT Magazine.

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CAT’s Inside Line: Ford Focus


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How do independents stack up online?

An article on dealer-focused website Motor Trader caught my eye this weekend.

The article laid out the results of an online investigation in which the Motor Trader team approached 40 dealers through social networking site, Twitter, looking to buy a car. Those dealers all had active Twitter accounts.

So how many of those 40 do  you think responded with offers of test drives and bookings? Just 12.

Of those, only half responded within an hour and just three engaged the pretend customer in conversation.

Now fair enough, this research is based around buying a car rather than running it, but the lesson learnt can be applied to almost any trade. If you take the trouble to get yourself online, then make use of it. We know there are thousands of members of the independent automotive aftermarket, from suppliers to factors and garages to retailers using the social networking platform to get their message across, and for some it works wonders.

Increasingly consumers are turning to the digital realm to find the right workshop to take their car, so being online and being active is more important than ever.

Do you regularly get customer referrals online? What’s your top tip for the aftermarket when it comes to social networking? Let us know in the comments below.

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What are your New Year business resolutions?

The winter could still bring you work

The winter could still bring you work

This winter hasn’t yet turned out to be the white blizzard some expected it to be. I say yet, because January and February are traditionally our coldest months, so the snow and ice could still cause serious problems.

However, the upside is that those problems could mean extra work for your business. Batteries, brakes and bodywork could all potentially bring in more profits for your workshop, if you know how to market your services to customers.

If you’ve been listening to what CAT’s knowhow contributors have been saying over the past few months you’ll know the value a little change can bring. Whether it’s brushing up on your employment law, taking on a new member of staff, offering an extra service to your customers or even just giving the exterior of your premises a new lease of life. It all helps to build your business.

2013 has the potential to be a big year for the aftermarket – technology will continue to evolve at a terrifying pace and at the highest levels of the industry mergers, buyouts, sales and consolidations will, I’m sure, give us plenty to talk about.

Rest assured that CAT will be there for every twist and turn.

Happy New Year from the CAT team – let’s make it a good one.

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Just 5 days left to vote for your aftermarket heroes

Voting for the CAT Awards 2013 closes this Friday, 21st December.

Make sure your votes are in before this date, as votes cast after this date will not count towards the final result.

If you need reminding of who is in the race for this year’s awards, here’s our nominations rundown.

Or, if you just need to cast your votes, click here.

This year has already attracted a record number of nominations and votes, with businesses from all areas of the aftermarket fighting it out to be crowned the top of their game.

The results of the CAT Awards 2013 will be announced in the Awards issue of CAT Magazine, out February 22nd.

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MOTORIST’S FORUM

After Transport Secretary Justine Greening revealed that the Government was no longer going to push for longer 4-2-2 intervals this February, a review of the MOT system was announced.

A key aim of the review was to give consumers greater faith in the tests and work being conducted by MOT garages. Greening said: “I want each motorist to be confident that a visit to the garage ends with their car repaired to a high standard by a reputable mechanic rather than uncertainty about cost and the quality of service.

“Giving drivers the very best information about garage performance is absolutely key to achieving this goal.”

As a result, the Motorists Forum was created by the DfT to gather evidence and advice from the industry and consumers on the best way forward in delivering on Greening’s commitments.

The Forum is, initially, empowered for 12 months and has so far met three times in a bid to reach agreement on recommendations. Chairman of the Group, and former SMMT Chief Executive, Christopher Macgowan has already had a one-to-one meeting with Greening, but formal proposals will only be submitted following a further meeting.

While some proposed recommendations have garnered broad support, other suggestions from some Forum members look set to be rigorously opposed by others.

The most contentious of which is that all MOT garages should, within a year of the Forum’s report, sign up to a “suitably approved and enforced” code of conduct. Membership of such a code should become a requirement for entry into the MOT system, the recommendation reads.

Several Forum members quickly interpreted this as meaning membership of the Motor Code for Service and repair, since Greening herself referenced the SMMT-owned scheme in February. The Motor Code is also targeting and canvassing for all MOT garages to join the scheme.

Halfords’ Bill Duffy, who vigorously campaigned against 4-2-2 interval, questioned that mandated Motor Code membership should be recommended and said the key thing was to convince consumers of the quality of work and routes of redress if things went wrong, whichever banner this could be achieved under.

The AA’s Theresa Perchard said research shows approved codes are better than formal regulation. The whole panel agreed that this was not the way forward, and said whether one code in particular should be adopted was a separate debate. Perchard also said the approval process has, in the past, been slow.

Trading Standards boss Rob Gainsford also thought the recommendation should be about OFT-approved codes in general, and not one in particular. Now in charge of administering approved codes, Gainsford acknowledged that the process is not perfect, but said he was committed to working with stakeholders to address issues.

SMMT Chief Executive Paul Everitt said there was nothing stopping any other organisation from developing a code if they chose to then compete with existing schemes.

While the RMI’s Independent Garage Association has said the industry should have only one code, the IGA still has its Trust My Garage badge of honour for members.

IGA Director Stuart James told the Forum that he represented 3500 independent garages that are audited by the association and which proved to have very low levels of complaints. James said more options than codes should be explored, even if this takes more time.

While the formal licensing route is not backed by any member of the Forum, it seems likely that the proposed target of code membership within a year will be made less ambitious.

Revised recommendations are now being circulated to Forum members, but Chairman Macgowan conceeds that not all members still might not feel able to sign up to the report. The report can, in any event, be submitted without every members’ signature.

Other contentious recommendations are that garages which have signed up to a suitably approved and enforced code of conduct should be subject to less scrutiny by VOSA administrators.

A number of Forum members questioned the focus on the MOT since the broader remit of the group is to recommend on improvements across the service and repair board, while Duffy said the goal should be for universal technical standards.

It is a similar story around the proposed recommendation that all garages should be obliged to have IMI, ATA or equivalent training. Members thought incentives for training should be introduced rather than compulsory measures and that other routes to competence should be considered, not just for technical skills but also for customer service.

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You have until 21st December to vote for your aftermarket heroes

The end is now in sight for the CAT Awards 2013. Voting for this year’s awards closes on the 21st December, so you have until then to vote for YOUR aftermarket heroes.

The winners will be announced at a glittering awards ceremony in February, and a full report will be in our special awards edition of the magazine soon after. Of course, you can follow CAT Magazine on Twitter and Facebook for live updates throughout the day, too.

Each year we see real business benefits coming to each of our award winners, as well as local and national media coverage. The full list of nominees has been up for a while now, and you can find it here. Time is running out to cast your important vote, though, so make sure you do it before it’s too late!

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Production seen first hand with Gates

Finished belts ready to be boxed

Finished belts ready to be boxed

Gates’ Balsareny production plant in Barcelona is one of three sites in Europe which make the company’s new Micro-V Horizon belt.

Marc Etaix is the man in charge of making sure production at the site runs smoothly, and CAT joined a tour around the plan to see production of the new belt in action.

It’s always fascinating to see real production taking place, and the ingenuity with which man and machine come together to produce the final product. Inside the Balsareny facility we learned how a secret mixture of rubbers is first formed into flat strips, how tightly woven cord is then place in between different layers and how the different layers of the belt are heated, cooled,  made into shape, and then cut.

A particularly interesting sight for me was seeing grooves being cut into the finished belts. Where different applications require a different number of grooves the belts have to be made to order – so row upon row of machines cut just the right number of grooves for any application. There are even ways of cutting grooves in both sides of the belt for use in some modern engines.

It was an enlightening visit, and my thanks to Gates for allowing CAT to take a tour of the site. You can read more about the visit in the December issue of CAT.

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Eurozone fallout – will it affect your business?

Has your business taken adequate steps to protect it from any future eurozone currency changes, considers Stephen Sidkin.

For many, the question on their lips is which country will be the first to exit the eurozone.

Whether an existing eurozone member jumps or is pushed is irrelevant. The consequences for many businesses are likely to be severe. This is particularly so because there is no English or EU law which addresses the legal effect of a change of currency resulting from a eurozone exit. This stands in stark contrast to the situation in certain US states that have such laws.

Take, for example, a British company selling into the Italian market. What will happen if Italy leaves the eurozone and the new lira emerges as the Italian national currency? For some businesses there will be a formal agreement providing for it to be governed by English law and for the English courts to determine disputes. However, even if this is the case does the agreement provide that payment can only be made in sterling or euros, or is it written in such a way that the Italian buyer might try and pay in new lira?

Does the agreement include a force majeure clause? If so, is the clause written in such a way as would enable the Italian buyer to claim that exiting from the eurozone is an event of force majeure allowing it to claim that it is no longer required to perform the agreement? Where, however, there is no formal agreement – good luck!
The converse is also the case where a British buyer is purchasing goods from a business located in, say, Greece, another prospective exitee from the eurozone. The possibility of being able to pay in heavily devalued new drachma may be a very attractive option. But will the British buyer be able to take advantage of it?

In view of this, where you are selling to businesses in countries that may exit the eurozone the steps that you should be taking now are as follows:

Existing agreements

Firstly look at the provisions in your contracts that deal with currency and payment. Run some scenarios to test if these provisions work in your favour. If they do not, seek to accelerate performance of the contract so as to reduce or limit your risk. Do your existing agreements provide for force majeure? If so, what would be the results if the buyer should be in a country that exits the eurozone? Do you use a credit insurer? How robustly does your agreement with it deal with the buyer being in an exiting country? Does the credit insurer have a way out if a prospective exitee exits? Lastly, do you rely on a third party guarantee of your buyer’s obligations? If so, consider how all of these issues may apply to the guarantor.

New agreements

‘Forewarned is forearmed’ so in respect of agreements which you will enter into during the course of 2012, you should ensure that the agreement is expressed to be governed by English law and that the English courts will determine any disputes between the parties. As the seller, a failure to do so is likely to leave you exposed.

Consider issues such as what is to be the currency of payment? How are you going to be paid? You should also ensure that the contract provides for payment in an exact currency, for example, sterling. To include a provision where payment is to be made ‘in the currency of the Republic of Portugal’ is only likely to result in very severe problems.

Will you require the buyer to put in place a letter of credit? If so, ensure that the letter of credit is confirmed by the nominated bank; this may help avoid the problem where the bank issuing the letter of credit is in an exiting country. It is equally important that the letter of credit is stated to be irrevocable. This will avoid the issuing bank revoking it and you losing out.

Where you are trading with businesses in countries that may be about to exit the eurozone the above steps should be taken; they should help you find the best way to ensure that a eurozone exit is a grey cloud which may actually have a silver lining.

In some ways, the problems caused for businesses by the eurozone crisis have been a long time in coming. For those companies trading with businesses in likely exitees from the eurozone, the widely publicized problems may be about to come to a head.

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