Sheltowee Outpost

Five tips for entrepreneurs dealing with a failing business

Five tips for entrepreneurs dealing with a failing business

Oct 27 2014

This is a follow-up to my last article which was on the unhappy topic of knowing when to quit.  As entrepreneurs we are bombarded with the stories of the person who bet the farm on the business at the last minute and pulled the business out of the crapper to become a shining success.  These stories are inspiring and a critical driving force for many of us.  The harsh reality is that sometimes you bet the farm, and you lose the farm.  Most businesses fail and most successful business people have endured a myriad of failures.  I want to provide some tips on how to handle the situation of actually crashing a business.  As I mention this is not as inspiring as the stories on pulling it out at the last minute, but I really hope that those of you who may be in the midst of a business in trouble, will take some solace in the following tips.  For those of you who are just starting a business, let this be encouragement to structure your business in a way that allows you to hope for the best, but prepare for the worst. 

1. Remember that it is the BUSINESS who owes the creditors.  For many of your unsecured debts and bills, they are most likely in the businesses name.  The business is a separate legal entity from you and although you probably feel responsible for the bills, you are only responsible as far as the business is capable of paying them.  This of course does not apply if you have secured loans that required your personal signature.  You ARE personally responsible for those bills. 

2. Keep creditors informed, but don't make commitments.  Often times once you fall behind on the bills, the creditors will call and notify you that the call is being recorded.  The tendency can be to avoid these calls.  It is always good to keep your creditors informed, but DO NOT make commitments that you cannot keep.   There is also the tendency to promise things that you can't deliver.  If you have not signed personally, do not let some skilled telemarketer talk you into making a personal commitment to pay a bill that is owed by the company.


3. Don't make personal commitments to pay back investors.  I was talking with an entrepreneur recently who was bragging that he had a business that lost $250,000 of investor's money, and he personally paid them back.  That is great if you can withstand that kind of hit and move forward, but the fact of the matter is, that most of us cannot plop $250,000 on the table to repay an investor.  If you have met your responsibilities as an entrepreneur and disclosed the risks to your investors, you are not obligated to repay them, nor should you verbally obligate yourself.  If you are the typical entrepreneur, and you start another business and hit it big, go back and surprise them and pay them back then.  But don't put you and your family at personal risk by making personal commitments. 

4. Don't let your attorney convince you to file bankruptcy without considering other options. It is certainly appropriate in some circumstances to file bankruptcy.  But if your business has little or no assets, then don't let an attorney talk you into filing bankruptcy.  I promise you, they WILL get paid and it will come at the expense of some other deserving creditor.  If you have maintained your business as an LLC or other legally organized business, it will be difficult for creditors to pierce the vail of the company.  Keep in mind that if you signed personally, or put your house up as collateral for a loan, those creditors will hold you personally liable, and you should absolutely consult an attorney on how to protect your house.  You should also consider focusing solely on those creditors with any revenue you may have to make sure you don't lose your house.  But make sure that you try to capture as much of the debt in the company as you can without signing personally.  Often times you can roll up your business without filing bankruptcy, but this WILL not be the advice your attorney gives.


5. Don't lose hope.  Financial difficulties of a failing business can be debilitating.  I know from experience.  I also know that there is always light at the end of the tunnel.  Crashing a business is not the worst thing that can happen to you, although it can certainly feel like it is.  Owing people money (often times friends or family), and admitting that you have failed can be incredibly traumatic and embarrassing.  The beautiful thing about America is that there are no debtor's prisons and that you can always start over.  Be sure to learn from your experience and know that you can rise from the ashes.  It will take time, it will be painful, but you WILL get through it and you will be a better business person and stronger for it. 

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