Failure responses

guest commentary by David Potts

Most small businesses are built with blood, sweat, and tears and the business is successful because the owners are willing to work hard, driven by the hope and the expectation of building a better life for themselves and their family. I believe it is this drive and determination that help make the United States of America the richest and the most powerful country in the world.

People who start or buy a business are courageous people because they are willing to risk failure to create something important. I heard a quote years ago that stuck with me. It was credited to Mark Twain. The quote was, "show me a man who failed and I will show you a great man.”

A great man is willing to risk something to achieve something. For this man there is no shame in failure. But then … maybe I spoke too quick. I think this quote needs to be qualified.

During the last 25 years I’ve seen many businesses fail. During our last recession I had the opportunity to observe a couple businesses fail, but fail differently.

Both of these businesses had operated successfully for years. Both business owners knew their business and had experienced periods of prosperity. Both had a wife and children. Both men were churchgoers. Both were active in the community and had a reputation for honesty. Both businesses were incorporated and therefore their personal assets were protected from their corporation’s creditors. But both had events that caused their businesses to fail. At this point, when their businesses failed, their similarities began to diverge.

The business owner whose business failed first lived an upper-middle-class lifestyle. When he saw the difficulty in continuing his business he was greatly concerned about his employees and the vendors he owed. As a last resort, he found a buyer for his business.

Though many jobs were saved, the sales proceeds from the sale of the business were not enough to pay all the company’s vendors. His corporation still owed more than six figures of debt. Although he was individually protected and not legally obligated to pay his corporation’s vendors, he chose to do so. He reduced his lifestyle and sold other personal assets to pay the corporate debts because they were incurred under his leadership. He felt responsible.

It has been several years since he sold his business, but he continues to pay his debts today. He and his wife drive older cars and live modestly. They go to church and always did to see what they could do for God and other people.

The second business owner always lived a high lifestyle. He was known for driving expensive cars, wearing expensive clothes, and taking expensive vacations. This lifestyle continued even as his business suffered. It was the bank who finally shut him down.

This business owner had always wanted his business to be known as a “Christian" business, but the way he behaved after the business closed was anything but Christian. There was no attempt to pay any of the company’s vendors. There was no attempt to pay any personal guarantees, promises to pay the debt if the corporation was unable.

His primary interest at this time was to protect his high lifestyle, avoid losing his expensive cars, and maintain his social standing. He goes to church to see what God can do for him and this will probably always be his purpose for attending church.

There is still truth behind the saying "Show me a man who failed and I will show you a great man.”

The first business owner is a great man. His business failed but he never took money from the business to live the high life to the detriment of his vendors. Obviously, our second business owner is not a great man. Actually, he is a thief. He took money from his business while it was failing to continue living his expensive lifestyle to the detriment of his vendors. The only difference between the second business owner and a common criminal is that he didn’t stick up a liquor store.

Now, just for clarification and to avoid any unnecessary lawsuits, neither business owners discussed above are specific individuals, neither were they clients of mine or based on clients of mine. I would call them “real people” because they’re composites of business owners I’ve seen over the years and how they behaved when their businesses failed.

I don’t believe in a debtor’s prison and I understand that bankruptcy is at times needed and required. At times businesses fail and the owners would never be able to live long enough to recover financially. But the people who deserve a fresh start are the ones who didn’t take funds from their company or continue to incur debt to buy big houses and big cars as their business failed.

Business owners who rob funds from their business when it is failing to protect an excessive lifestyle with no thought of the detriment caused to their vendors and employees, money needed by their business to pay bills, these business owners should be publically shamed and called what they are: thieves. The ones who paid their bills or genuinely tried to pay their bills should be respected for taking a risk.

Tip: If you sell your business, make sure you cancel all company credit card accounts which were opened while you were operating the business. You most likely signed a personal guarantee when you signed the original application. Don’t transfer the cards to the new owner. It has happened more than once where the previous owner has been contacted by a collection agency 10 years later asking them to make good on their personal guarantee. This generally doesn’t help your credit score.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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