Inc . Roundtable participants:

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John Koss Age 60; in 1953 founded Koss Corp., in Milwaukee, which became a leading maker of stereo headphones. Koss filed Chapter 11 bankruptcy in December 1984; reorganized and reemerged in December 1985. Last year's sales: $27 million.

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Bill Lewis Age 48; has started eight companies. Lewis filed personal bankruptcy twice, in 1977 and in 1986; now founder and CEO of Federal Refunds Inc., Jacksonville, Fla., which assists purchasers of petroleum products in recovering funds on overbilled accounts. Last year's sales: $1 million.

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Paul E. Perkins Age 51; in 1978 founded Voyages International Travel Co., in Highwood, Ill., to disseminate travel information using optical disk storage and computers. Filed personal bankruptcy in 1989; currently driving school bus while beginning a new enterprise.

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Michael E. Salvati Age 38; in 1985 joined Virtual Network Services Corp., in Oak Brook, Ill., a long-distance telephone-service provider, as a vice-president. Company filed Chapter 11 bankruptcy in 1986 and was sold three months later. Partner and bankruptcy specialist at KPMG Peat Marwick, Chicago.

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In the minds of many entrepreneurs, bankruptcy means failure. But four small-company executives who have been through it contend that, although it's not a goal anyone is likely to aim for, it can be a tool: a painful but effective way to learn how to look at your company and your goals differently. And, they say, the lessons of bankruptcy are there even for -- maybe especially for -- those who have not gone through it.

Given the shape of today's economy, we decided that now would be a good time to take out of the closet and dust off a topic most Inc. readers probably prefer not to think about. Senior writer Tom Richman sat down recently in Chicago with three current or former chief executives and one former chief financial officer who had been through bankruptcy proceedings to discuss what it was like and what they had learned.

INC.: Each of you had to have done something somewhat unusual to be invited here. Can you explain what that was?

PERKINS: I had six little companies that I dissolved, and I wound up in personal bankruptcy. No, I didn't have condos, yachts, or a lot of expensive clothes. Instead, I had signed for a lot of expensive electronic equipment, so I took personal bankruptcy. We live on my wife's salary. I drive a school bus every morning because it keeps me alive.

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INC.: John, your experience?

KOSS: We tried to diversify, to go into other areas, and we stopped paying attention to our core business, which was stereo headphones. We started to get involved with the Walkman-type personal electronic products. It didn't work, but we spent more and more time trying to make it happen and less and less time on what we knew. Other people took the opportunity to sneak into that market.

We wound up with horrendous debt. In four years we went from practically no debt to $14 million, and sales headed down, from $25 million at their peak. We tried to work with the banks, to get them to understand it was going to take a while to turn this around, and they said, "To us, long term is about a year." That wasn't going to be enough time. So we realized we were going to have to call the guy with the black robe to hold them off while we got this thing reworked.

LEWIS: I've had two sevens -- Chapter 7s. That should be lucky, and in a way it was. If I'd continued on the track I was on, I'd be dead. I've recovered, like an alcoholic, I guess. The only problem I have with it today is that I can buy a Porsche, but I can't rent a Ford. I can't get plastic.

SALVATI: I was at Peat Marwick, and one of my start-up clients was a long-distance phone company. It recruited me as vice-president for finance. I thought it would be a good opportunity to get into a business on the ground level and use my skills in a way I couldn't as a consultant. We lasted two years. We grew from no sales to $15 million in 12 months on an annualized basis. In fact, one of our problems was, we were growing too quickly.

We put in a new president and tried to restructure and sell the company. We found a buyer, but on the day of the signing he decided not to do the deal. We filed Chapter 11 bankruptcy instead, and within a week there was a hostile takeover attempt; some people wanted to come in and assume our position in bankruptcy, but I could see that they had no more cash than we did. We had to hold them off in court until we found another qualified buyer.

The new owners offered me a job as controller, but I decided to take some time to unwind. Now I'm back at Peat, working with companies in bankruptcy.

INC.: You frequently hear the phrase, "sought protection under Chapter 11 of the bankruptcy code." Is that accurate: protection?
SALVATI: That's the reason we filed. We were under tremendous pressure from our creditors because we owed them about $8 million. We were on a 24-hour disconnect notice from our long-distance carriers. By the time you decide to file for bankruptcy, you've got so many people ganging up on you, and it takes only one to ruin the business.

INC.: You believe, most of you, that you got a fair shake from the bankruptcy court?

SALVATI: Yes, but remember that the protection is just from the creditors. You're still out there competing in the marketplace with a weak capital structure, and your customers are getting phone calls from your competition.

One thing you learn in bankruptcy is that you no longer control your company. The court does. All the interested parties in the world are in there talking to the judge, and you're not out calling on customers. You're spending your time in court.

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INC.: Nobody forced your company into bankruptcy.

SALVATI: No, we made the decision ourselves, and that's one of the hardest things an entrepreneur can come to: deciding to file. If we had waited another two weeks, we would have been shut down, and nobody would have bought us. A lot of companies moving toward bankruptcy have opportunities to file early, but they're reluctant. They keep looking for those little incremental successes to keep them going.

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INC.: You mean people aren't willing to admit to themselves that they'd better get out while they can?

SALVATI: Not so much getting out but giving up control of the company. The entrepreneur's drive to succeed is so strong, but he can see success in only one way: in meeting the goal he originally had in mind. Maybe success to him was going public.

I viewed success differently; I viewed it incrementally. Success was going public if we got the $6 million in equity, but we didn't. So then success became getting to profitability, selling the business, and getting our money out. We came up short there, too, so you keep working your way back. But entrepreneurs typically hesitate to lower their goals, and they end up losing more control.

LEWIS: Let me say something about the difference between personal bankruptcy and company bankruptcy.

KOSS: Different world.

LEWIS: Yeah, and it's difficult to separate the entrepreneur from his business. If you're a ground-start entrepreneur, you put everything you've got into the company. You've got to pay the employees, so you sell the house. You do whatever you've got to do. I didn't do anything illegal, but my point is you do anything you can. And when it finally collapses all around you, like my long-distance company did, everything goes down the tubes, and you go with it. You don't make plans to go Chapter 11; you just say, The hell with it, close the door, and file a Chapter 7. They take your Rolex and your limousine and everything anyway.

In Chapter 11, don't the guys starting the company keep their own personal money?

SALVATI: Not really. I was probably one of the company's largest creditors. Besides, I had 160 people looking to me to make sure that they got paid, so it was somewhat personal.

LEWIS: You can rent a Ford, right?

SALVATI: Yeah. But it's exactly what you said. You're so wrapped up in it. I see it all the time in my work now. Companies have opportunities where they could probably have done a restructuring outside of bankruptcy if they had started three months earlier, but you just don't want to give up. You think, If I change this or change that, it'll work. I've had these incremental successes; I can do it again. Everybody is behind me.

Well, what happens is, you go from there right up to the brink of bankruptcy. When you're short of cash, you have all those balls in the air --

PERKINS: Employees turn on you.

SALVATI: And if one of them falls --

PERKINS: But in an entrepreneurial company, you say you're going to get it done no matter what. When you're an entrepreneurial start-up, you're living with your suppliers because you're always behind in your bills. You're living with a Chapter 11 every day. You've always got those people who could close you down in a minute if they pulled the plug.

I get a big kick out of people talking about timing. That's a crock. Timing is an after-the-fact analysis. I want to hear somebody tell me about how they planned it up front and knew exactly what day this was going to happen.

LEWIS: Yeah, that's bullshit.

PERKINS: Where you hit my hot button, Bill, is when you said, "Is it personal, or is it corporate?" When you're an entrepreneur, it's all the same.

LEWIS: You've got a lot of pain. I can feel it.

PERKINS: I've got a lot of anger.

LEWIS: Anger, pain. You've got a lot of it. I finally got over it when I quit saying, "If I only would have . . . " or "I could have . . . "

I was brokering long-distance service through another company's switch, the first in the country to put multilevel marketing into long-distance service. We were growing so damn fast they couldn't handle our business. All of a sudden, the company in Memphis that I had contracted with was sold, and the new owner wrote me to say they would no longer provide the service. They gave me two weeks to move my customers. We tried to get an injunction, and my screwy lawyer didn't know what he was doing. They had about 10 New York lawyers. Some lies were told. I knew the courts were going to rule against me. I left and went straight to the office. I called another company in Memphis and asked if they wanted my customer base. I sold it to them, locked the door, and left. There wasn't any reason to go through a bankruptcy. It was painful, man --

SALVATI: I think --

LEWIS: But let me finish. When I finally got over all that, that was when I quit blaming other people. It wasn't the fault of the CEO of the other company. It was my fault because I didn't plan far enough ahead. It was as stupid as hell of me to sit there exposed like that. You see?

INC.: Does it cost you anything in your head, your heart, or your gut to file bankruptcy?
KOSS: It costs a lot. The guy who starts the business never thinks it's going to fail. That is why most bankruptcies are too little, too late. People wait too long, thinking something will happen at the last minute. Somebody has to be objective for you in your organization. If you are an entrepreneur, that person has to tell you, We've got to stop here, or there will be nothing left. I don't think the fellows in Chicago who became our lead bank realized that they weren't dealing with a man and a business; they were dealing with a man and his life's work -- not only my life's work, but my wife's and the five kids'. What were we going to do, take something we had spent all our lives developing and just throw it away? Or were we going to fix it? It was never a question of whether we were going to turn it around, just when.

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INC.: So it was more than a business issue for you?

KOSS: Yes, it was the family, the lifestyle, the whole thing. It wasn't just deciding with your wife that, gee, the business has come to the end, so we'll let it go and do something else. This was an exciting life's work. Most entrepreneurs are like that. They get hung up on a product or concept or idea, and then they're not doing it just to amass money.

LEWIS: It's a child.

KOSS: Yes, but you don't think about it that way until somebody threatens to take it away from you. Signing those Chapter 11 papers was hard -- especially because of my age. I'm from a generation where you never did that.

INC.: How did you reconcile this bias you had against bankruptcy in light of having to file for one yourself?

KOSS: I talked to a lot of people, including some friends who had gone through it. One friend gave me very good advice. He said: "When you do this, you'll want to hole up at home. You won't want to talk to anybody or see people. You're going to feel like a beaten animal. Don't do any of that," he warned me. He said it would eat me up from the inside, and I'd die from it.

LEWIS: You need to do it for a few days, though, don't you? You might kill somebody.

KOSS: The first night I stayed in and sat with my wife. It was on the television, and of course, I had called a few friends to let them know it was coming. The next day, though, I went charging into the office with a very positive attitude because we were going to get through this thing. We were sharing information about what was going on with our employees and everybody else.

Another friend told me that there's another reason that you don't go into hiding. The reason is that a lot of people out there want to help you.

LEWIS: Sure, if you're talking about Chapter 11. What about Chapter 7?

KOSS: I don't know, but I bet there are still people who want to see you, who want to help, but they don't know how to get to you. They're not going to call you on the phone or ring your doorbell, but they can get to you if you're out in the open.

INC.: Bill, was your family involved in your decisions?

LEWIS: Sure, just the first bankruptcy. I had a real estate firm, and always one to do something different, I had bought a limousine and hired a chauffeur so we could pick people up at the airport and show them property. Then I came up with the idea of getting all these brokers together under one roof with pictures of the subdivision lots, but it didn't work. I lost everything, including the house, and my wife and child had to move out because I couldn't feed them. But eventually they came back, we bought a house, and --

And we lived happily ever after?

No, I went bankrupt again. The guy who lent money to me for the long-distance company really lent it to the corporation, but he came to me to get it back. Then he got a lawyer, and I couldn't afford to fight it, so I said, What the hell, and filed personal bankruptcy.

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INC.: Would you do something different now if you had to do it again?

KOSS: Yes. I'd have filed earlier. I wouldn't have trusted the banks that we were going to work this stuff out together and all that nice stuff that they talk about before they turn you over to the workout people.

PERKINS: The idea of filing sooner assumes you've got money stashed to hire competent attorneys. No good lawyer is going to take a bankruptcy case on contingency -- on the assumption that you're going to survive and pay him later.

SALVATI: No, they'd be crazy to.

PERKINS: But no entrepreneur is going to take money from investors saying it's to keep his company alive while he's really stashing it to hire a bankruptcy lawyer. That would be wrong.

SALVATI: But it's not just stashing up money to go into bankruptcy. Bill decided he couldn't take his long-distance company any further and sold it off. Is that failure? We sold a business to another company, many people kept their jobs, and my customers did not get damaged by picking up the phone and not getting a dial tone. I view that as a success.

INC.: You -- all of you -- had expectations. You had fantasies about where this business was going to take you, dreams. What happened when reality didn't match

the dream?

LEWIS: It was devastating.

KOSS: You go into a survival mode. Remember, I'd been at it for more than 30 years, and most of that time, even though it was my company, I was subject to other people's control. Holy mackerel! It was 20 years before the bank didn't make me sign everything over -- family, dog, kids, the whole deal -- to use their money. Years! I knew what it was like to wear a collar, and I didn't like it. Now I was wearing one again.

LEWIS: The answer is, there is no alternative. You dust yourself off. . . .

There was a time, though, when I sat in my office and cried, and then I put a gun to my head.

The things that were going on in my life -- I'd lost my company, lost my home, lost everything. I couldn't handle it. Like the AA people, I turned it over to someone or something stronger than me -- to God -- and that's the only thing I could do.

I begged the telephone company not to turn off my service. It was so demeaning.

KOSS: Humbling, very humbling.

LEWIS: Yeah, and that was the good part. I was a peacock, man. I had limousines, chauffeurs --

PERKINS: But see, I never had all that stuff. Don't look for my condos in Brazil and bank accounts in Switzerland, because anybody who knew me knew damn well there weren't any. What caused the problem was that these lawyers think everybody else, including maybe themselves, would do that kind of thing, so they think you did it.

INC.: What benefits come from this experience?

LEWIS: Listen, this lesson was extremely expensive. I paid dearly, my family paid dearly, and I'm a no-good jerk if I don't come away learning something from it. Yeah, I learned a lot. I'd be an incredible CEO for some company. I'm the best.

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INC.: You haven't chosen to do it for someone else, though.

LEWIS: No, well. . . .

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INC.: You've started another company of your own. What lessons are you applying?

LEWIS: I don't stay in hotels that cost $200. We had our first sales meeting in Vegas two weeks ago, and the 20-something agents who came paid their own way, their own hotel bills, everything. Back during the Phone Company Inc. days I would have paid it all. I probably would have hired some dancing girls, all that stuff. I've learned how to get more for my dollar, not to throw money around.

I've done one thing I feel good about, though. I bought a Porsche a couple of weeks ago. I kept thinking, I get up at 3:00 in the morning a lot of times and go to the office, and then I go home and sleep; then I go back to the office and home to sleep. What am I getting out of this? I want a toy, something I can touch and feel, you know? So I bought a Porsche.

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INC.: Does it ever go through your mind that this business might fall apart, too?

LEWIS: Hell, yes, but you don't let that be a negative. You make it a positive by keeping an eye on those cracks in the floor and making sure that nothing falls through them.

KOSS: I learned about OPM -- other people's money. Leverage was the way to go, they told me: leverage, leverage, leverage. I tell you now, that's not the way to go.

SALVATI: You know, when we filed bankruptcy, it was the first chance I had to breathe in 15 months. We were practically insolvent the day I walked into the company. We never had enough money. I went without my paychecks.

That's not the way you think it's going to work when you come from a big, prestigious firm. With the bankruptcy, now all of a sudden I knew there was a light at the end of the tunnel. Part of the reason we had survived as long as we did was that we had always behaved as if we were in bankruptcy, and now we actually had the court protecting us.

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INC.: So, for John and Mike, bankruptcy was a help?

SALVATI: There's a lot of disappointment in seeing something go so far but not as far as you'd hoped. We didn't reach our ultimate target, and I felt bad because there were shareholders who believed in me, banks, creditors, employees. Still, we built something from zero to a pretty substantial company on a tremendous growth curve, and I took a few things away from that experience that I use today.

INC.: Is failure -- to the extent that bankruptcy is seen as failure -- a culturally acceptable event?

LEWIS: Oh, yes. It's as if you're in a stock-car race. You run out of gas every once in a while, so you have to make a pit stop. Then you get back in the race and keep gunning that sucker. I can't put it in words too well, but that's the way I think of it.

KOSS: Failure is when you join the turf club. Anything else is an experience that didn't work out too well. Bankruptcy is a tool. If you try your best and you're an ethical and honest businessman and circumstances work against you, the tool is there to give you a chance to start over. We started over, and my God, look at all the jobs and the families we saved.