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The F Word

Failure: for entrepreneurs, there's both a right way and a wrong way to go bankrupt. Here's an overview of the recent demise of catalogue retailer J. Peterman Co.
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Failure is either very, very bad or very, very good. When businesses fail, people lose jobs, money, time, and confidence. But FAILURE is often cited as the secret to American success. It frees up underperforming assets that could be better utilized elsewhere. Business start-ups and the failures that accompany them feed what Joseph Schumpeter termed "the perennial gale of creative destruction"--the birth-and-death cycle of entrepreneurial life. There is even a generally conceded "best" way to fail: fast and hard. "The living-death kinds of businesses that drag on for 5 or 10 years are worse than failing outright," says one expert. "The longer they hang in there, the more costly it becomes in terms of personal and opportunity costs."

When John Peterman lost his company, a USA Today reporter suggested that the cause may have been the curse of Seinfeld. Writer Gary Strauss pointed out that a number of popular products FALTERED after being featured on the sitcom, including fast-food chicken from Kenny Rogers Roasters, which was forced into bankruptcy; Levi's jeans, which saw sales fall by nearly $1 billion last year; Snapple iced-tea drinks, bought by Quaker Oats for $1.7 billion in 1994 and sold for just $300 million in 1997; and the $7-billion breakfast-cereal industry, which has suffered sales slippage of $800 million in the past three years.

A 1998 study found that most entrepreneurs running small companies attribute any successes to their own efforts but blame outside forces when their companies fail. J. Peterman lost nearly $25 million in 1998. John Peterman cited a SLUMP in catalog orders during the busy Christmas season as one cause. He added that the financial crises in Asia and Russia, as well as the impeachment trial here in the United States, had made customers jittery. He also blamed bankers who withheld credit at a critical time.

Talk about fast and hard: On January 25, J. PETERMAN CO. filed for Chapter 11 protection from its creditors. Just one year before, the $57-million company, famous for its lyrical catalogs and for having its owner caricatured on Seinfeld, had embarked on an ambitious expansion program that would have created 70 new retail stores.

Most failing companies have debts, so the owners turn to the courts for protection from the claims of creditors. Under CHAPTER 11, a company can sometimes reorganize and survive, although the numbers suggest that few bankrupt companies actually do. In 1998, according to Dun & Bradstreet, 6,501 business failures posted liabilities of $3.4 billion. That compares well with 1981, a peak year, in which there were 17,040 business failures (up from 7,564 in 1979).

Last updated: May 15, 1999




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