The Business Book

(Joyce) #1


liabilities. This method can be
especially controversial, since it
can allow the owners of the original
business to sell the “pre-packaged”
new entity and still be involved in
the business. In August 2008 the
London-based restaurant business
of Michelin-starred chef Tom
Aikens went into administration.
It was bought by TA Holdco Ltd.,
of which Aikens was appointed
partner and shareholder. Around
160 suppliers were left nursing
losses that would never be
recovered. However, by early 2010
Tom Aikens’ business achieved a
financial turnaround, and opened
three new ventures in London.
When pre-pack administration
is utilized, suppliers are revealed
to be in a much more vulnerable
position than might otherwise be
expected. The financial losses
incurred by Aikens’s restaurants
were effectively absorbed by
suppliers, not shareholders. In a
world of pre-pack administration
and Chapter 11 bankruptcy

protection, the creditors can find
themselves in a riskier position
than the shareholders.

Employees at risk
Staff employed by a business is
also at risk when a company fails.
When US energy company Enron
collapsed in 2001, an extraordinary
feature of the unfolding story was
the plight of many employees.
Unlike the senior executives, rank-
and-file staff had been part inspired
and part browbeaten into “showing
faith in Enron” by investing


personal pension funds in Enron
shares. When the business was
liquidated, employees not only lost
their jobs, but also their pensions.
When the collapse of the business
was becoming clear, Enron froze
its pension fund, preventing
employees switching their pension
holdings out of Enron shares.
Employees can also be
vulnerable due to the predations of
the investment market. If a company
is bought through private equity,
employees can find themselves
worse off if the business fails. A
private-equity purchase is when a
publicly traded company is bought
by a “private-equity group,” often
through a leveraged buy out, where
the assets of the purchased
company are used as security to
borrow funds with which to finance
the purchase. In so doing, the burden
of risk is on the business (and its
employees), not on the owners.
The UK franchise of Canadian
underwear business La Senza
collapsed in 2012, with 1,100
employees losing jobs. In cases like
this, the staff has little to gain when
things go well, but everything to
lose when they go wrong. Suppliers

Suppliers are among the last to receive
compensation for their goods or services
if a business goes bankrupt. If, in the
UK, it enters “pre-pack administration,”
suppliers might receive nothing at all.

Private-equity ownership
is typically structured in an
asymmetric way. If things go
well the private-equity owner
gains, and if things go badly
the subsidiary business loses.

“Heads I win”—in good
times, the business
owner stands to gain,
whereas the position of
employees changes little.

“Tails you lose”—in bad
times, the owner is protected
from losses, but the business
and its employees suffer.
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