- Seek outside support. When Mike Campbell's software business hit the skids, "friends didn't really understand," he says. "The general reaction was, 'Isn't that pitiful? I could have told him. He should have had a job like the rest of us."
But there is support out there. You just have to find it. Realizing that his food-processing company was swiftly approaching its demise, James Kilmer set up a lunch with several local entrepreneurs who had failed, "so I knew what to expect," he says. "One had had some problems dealing with banks and secured lenders. Another guy had bounced back. It gave me hope." Local Small Business Development Centers (SBDCs) can also provide a helpful word and a sympathetic ear.
- Think in terms of opportunity cost. Amar BhidÉ, a Harvard Business School professor who studies entrepreneurship, has this advice: Fail hard, and fail fast. "The living-death kinds of businesses that drag on for 5 or 10 years are worse than failing outright," says BhidÉ. "People waste not so much money as time. The longer they hang in there, the more costly it becomes in terms of personal and opportunity cost."
The thing is, most entrepreneurs find it hard to conceive that other opportunities exist. "You're so focused on what's happening, you think there's nothing else out there," attests Mike Campbell. "You think you're facing death." After his business failed, though, his perspective shifted dramatically. His most valuable asset, he realized, wasn't the particular product he'd been trying to sell. It was his own capacity to start and run a business--an asset that was readily transferable to his next start-up. Says Campbell, "You have to look at you as the venture."
- Establish a turnaround time, and stick to it. The 1996 Mt. Everest tragedy occurred, in part, because the climbers failed to heed the 2 p.m. turnaround they'd set for themselves--the point at which, no matter where they were, they were supposed to head down the mountain. Jeff Schwartz says he made the same mistake: "I'd say, 'I'm going to give it another year, and if I'm not profitable by then, I'm going to walk away from it.' But at the end of the year, even though I wouldn't be profitable, something new would pop up." Like the vague but tantalizing prospect of a huge new order.
Ironically, Schwartz notes, part of the problem was that his product--the talking picture frames--elicited such passionate responses. There was the letter from Babe Ruth's granddaughter ("You make a wonderful product and it is a fine tribute to my grandfather, Babe Ruth! Everyone who sees mine is fascinated!") and the endorsements from Wayne Gretzky and Bruce Jenner. "It's real hard to pull the gun out and shoot the business when you keep running into these things," says Schwartz. He wishes he'd paid more attention to the feedback that really counted: his numbers.
- Preserve the corporate veil. "There's a very fine line," notes Jeff Schwartz, "between having lots of guts and being really stupid." Here's one way to tell you're on the wrong side of that line: when you start borrowing funds from your payroll-tax and sales-tax accounts. Unlike most kinds of debts, shortfalls in tax payments can't be wiped away through declaring bankruptcy, meaning the IRS can come after the owner's personal assets--often with pit-bull ferocity--for employee FICA and withholding when the business fails. Yet a surprising number of companies resort to this most dangerous form of financing. "If you're going to rob Peter to pay Paul," warns Robert Lussier, a professor at Springfield College, in Springfield, Mass., who specializes in business failure, "never play it with the government." His advice: help remove the temptation by using an automatic payroll service like Paychex or ADP.
Another common temptation for owners of troubled businesses--and another opportunity for gratuitous personal exposure--is to make stopgap personal "loans" to the company. Trouble is, when an insider makes an unsecured loan to the business, that money is doubly at risk: should the company go bankrupt, the insider could be forced to surrender any money the company has repaid on the loan within the past year. Plus, if you're still owed money after the business folds, warns Denver business and bankruptcy lawyer Donald McCullough, take a number to get in line behind the other creditors. So take care not to commingle personal and business funds; keep the corporate veil intact.
- Keep your eyes peeled for the next opportunity. Out of the ashes of one business can arise the next. Paul Wenner's Gardenburger, for instance, was the hottest-selling item at his failed restaurant, the Gardenhouse, in Gresham, Oreg. Now it's the cornerstone of his Gardenburger Inc., a $57-million company. Better yet, Tulsa entrepreneur Bill Bartmann got the idea for his nearly $1-billion debt-collection business, Commercial Financial Services, when creditors were harassing him following the collapse of his oil-drilling-equipment business, in 1985.
- If humanly possible, make your investors whole. Of course, that fine idea isn't going to go very far if nobody will finance it. So remember that, while losing your own money hurts, it's losing other people's money that'll hurt you more down the road--especially if you have any plans for an entrepreneurial comeback. Though Mike Campbell exited his first venture with barely a penny to his name, he's thankful he managed to scrape up enough money to pay back his investors. "I thought it was the nice thing to do," says Campbell, "but it actually turned out to be a brilliant move on my part." Those investors turned around and helped him start his new company.
Failing well, part two
