Failure: The Secret of My Success

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• 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

But none of those steps will be effective, or indeed even possible, if a more elemental step isn't taken first. It's a step that's a precondition to all the others--one that's more psychological than procedural. And it's a step that's relevant for owners of even the healthiest of businesses.

You can't truly think in terms of opportunity cost, or know when to call it quits, or look for the next business idea unless you first--

• Understand that your business is not you. "Your world has ended when the product ended," says Rick DuhÉ, who tasted fleeting entrepreneurial success in the late 1980s with his faddish soft drink, Cajun Cola. "It was your friend, it was your wife, it was your lover. It was everything. It's like you divorced your family, your god."

DuhÉ's devotion might have been pushing the outer edge of extreme, but his experience underscores a key truth: if you are to fail successfully, the most important work to be done is not procedural but psychological.

"The key to dealing with failure is differentiating between global and restricted attributions of failure," offers psychologist Berglas. He explains: "It's called the locus of causal attribution. If you make a global attribution--'The business failed because I suck'--then the failure will be devastating. But if you make a restricted attribution--'It failed because the Japanese were dumping product and I lost my VP of information systems at a crucial juncture'--then it won't be so destructive. It has to do with storytelling, and it's how you differentiate self from situation." People who have passions outside the business realm (religion, community service, fly-fishing), Berglas adds, tend to have an easier time making restricted attributions and thus reconstituting themselves, because their self-esteem derives from multiple sources.

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