Knowing when to call it quits in business

Like many first-time entrepreneurs, when Sandy Tacchino of Fresno, Calif., opened her retail store Little Dreamers in a brand new local shopping mall, she put everything she had into the business.

In December 2006, the former middle-school teacher partnered with two close family friends to start up a high-end baby boutique. Not only did Tacchino invest every waking moment into her business, she also invested every penny of her family savings, the deed to her home and the whole retirement nest-egg of an elderly relative.

She was so engrossed in making the business succeed at any cost that she says she never stepped back to see the signs that the business was in trouble. It started sliding in June 2007, and in response she cut inventory and maxed out credit cards until there was no cash flow and, having run out of options, sought Chapter 7 bankruptcy protection in December 2007.

“I think we never really considered [bankruptcy] as an option because [our business] was a great idea, so who wouldn’t love our store?” she said.

Tacchino’s situation is becoming increasingly common for first-time entrepreneurs, notes Hagop Bedoyan, a partner at Fresno business law firm Caswell Bell & Hillison. They’re too focused on their own personal vision, and not carefully monitoring the investment they’re making in their company, he said. It’s not about dollars, it’s about having their dream turn into a reality, he explained.

Video   Going out of business Sept. 21: In our current weakening economy, sometimes it's hard to know when to let go of a dream that isn't paying off. MSNBC

In the Fresno area alone a total of 7,061 bankruptcies were declared over the past year, compared with only 3,789 bankruptcies in the preceding 12 months — an 86.4 percent increase, according to data from the U.S. Bankruptcy Court for the Eastern District of California. (The statistics do not distinguish between business and consumer bankruptcies.)

By the time Tacchino sought legal help to save her flagging business, Bedoyan says her customers had stopped buying, the company’s cash flow had dried up and her dream was disintegrating. The decline in the business wasn’t for any lack of effort on her part, Bedoyan said.

“She’s a very bright woman — energetic, like many of my clients, and idealistic about what she had set out to accomplish,” he said. “She was extremely disappointed that all of her dreams came crashing down. It was tragic."

After sinking some $400,000 into her business (including $200,000 of her own money), Tacchino faced a classic dilemma for small business: How do you know if you should cut your losses and walk away or continue fighting to hold on to your stake and your dream? Tacchino believed her can-do, go-for-broke optimism would result in an American success story, not a failure.

FIVE WARNING SIGNS OF FAILURE 1. LACK OF SLEEP While sleep disorders can be caused by physical and emotional problems unrelated to business finances, one of the key causes of sleeping problems is stress, and for a healthy business owner sleep disorders can be an early warning sign that something important is amiss. 2. THREATS OF LAW SUIT While a business owner may have the best of intentions to meet their obligations and the highest hopes things will work out, the threat or reality of a law suit should be clear warning siren that the business is in serious trouble. 3. LIENS AGAINST YOUR ASSETS Your business assets should be protected from creditors — having liens on assets is another clear warning sign of desperation and danger. 4. CHRONIC CASH FLOW PROBLEMS While cash flow problems are commonly experienced by most businesses caught between unpaid invoices from clients and unpaid bills to suppliers, if these problems can’t be managed the business cannot function. 5. PAYROLL PROBLEMS When an owner cannot meet the payroll and is deferring his or her own salary for several months in a row it’s a key sign that the business isn’t viable. Sources: Caswell Bell & Hillison, Your Business

“We could see things were getting tight and that we needed to change something, but [that] made me more determined to make [the business] work,” she said.

Experts like Timothy Stearns, director of the Lyles Center for Innovation and Entrepreneurship at the University of California, Fresno, agrees with Bedoyan. He notes that the hope that “things will somehow turn around” if an entrepreneur just puts their shoulder to the wheel a little bit harder won’t be rewarded if the business is going in the wrong direction. It all comes down to knowing when it’s time to quit, he said.

There are five especially important warning signs that should put a business owner on notice of an impending failure, says Bedoyan, such as when the firm’s cash flow won’t cover its daily expenses. (See nearby box.) He thinks the dilemma is similar to the difference between a recreational gambler and a compulsive gambler.

“When I go into a casino, I know that I’m going to lose a certain amount of money. And when I lose that money, I’m done and I leave. If a small business owner approaches their investment in this manner they’ll plan to give it six months or a year, and they should anticipate risking a certain amount of money,” he said. “If they don’t start making money at a certain point they should walk away.”

Looking back at her own records, Tacchino says she did reach a point where she started to rely on credit card financing when she was unable to depend on her company’s cash flow. That should have been a warning sign, she said.

Tacchino also sought help after it was too late. She says she had impeccable credit before she opened her store, but now she’s living in a rented home and has a record of bankruptcy that will follow her forever. She says she knows she held on too long, hoping things would turn around, and during those final, painful months the debt mounted rapidly. Had she walked away sooner she would have lost far less money, she said. With all her losses, both financial and emotional, she sees the failure of her small business as bittersweet.

“One thing I have learned is that if I had failed and was sad about it, and not energized by the prospect of doing it again, I wasn’t cut out to be an entrepreneur, Tacchino said. “But the fact that I’ve walked through the process, I’ve been a business owner, been an entrepreneur and failed, and I’m excited about the possibility of doing it again — that tells me that I’m cut out to be my own boss, and I would do it again in a heartbeat.”

Also in msnbc.com business Your Career: Married to the job, and each other Answer Desk: Qualifying for more jobless benefits Venza sorta-crossover is Toyota’s latest mistake ConsumerMan: Chinese drywall remains a big threat   Video: Nervous retailers begin Christmas countdown

MORE FROM YOUR BUSINESS

Home A-Loan

Home A-Loan Small Business Health: Swine Flu Small Business Inspiration: 'Ten9Eight' Business Answers: To cut or not to cut Elevator Pitch: Nomie Baby This Sunday on Your Business Local lenders Newsmakers: The credit crunch Open Dialogue: Community banks Business answers: Employee morale   Add Your Business headlines to your news reader: