In these days of hard work and rush, many budding entrepreneurs may be ignoring a cardinal rule of business: get it in writing.
“There are a lot of businesses that are dealt with purely on the basis of handshakes and in good faith, and unfortunately that often leads to some pretty messy situations,” small business lawyer Andrea Tarshus told “American Greed ”from CNBC.
In one of the most extreme examples of a business partnership gone awry, Charles “Chase” Merritt murdered his business partner Joseph McStay, as well as McStay’s wife and two children, in an apparent conflict involving nearly $ 43,000 Merritt owed McStay.
“Someone who’s integrated your business can backfire on you when it comes to greed,” said Britt Imes, assistant district attorney for San Bernardino County, Calif.
A California jury convicted Merritt in 2019 of four counts of first degree murder, and he is on death row in San Quentin State Prison.
It took more than four years after the McStay family disappeared in 2010 for investigators to link the murders to Merritt, who installed custom water features designed and built by McStay.
Authorities ultimately determined that Merritt had withdrawn thousands of dollars from the company’s account after the family went missing. Prosecutors argued that McStay tried to remove Merritt from the business.
Put your house in order
Although this is an extreme case of a partnership gone awry, business disputes can cause enormous damage.
“The partners don’t agree, or all of a sudden they have a lawsuit that surprises them and they try to find a way to work it out,” said Tarshus, whose law firm is in Buffalo. , New York.
The National Federation of Independent Businesses, the country’s leading small business advocacy group, urges entrepreneurs to hire a lawyer early on, ideally within 90 days of starting the business.
“Before you unlock your door, make sure your legal domicile is in order,” the organization said in a recent blog post.
A lawyer can help you choose the right business structure, review contracts to sign, help you manage your risks, and advise you on employment law.
If you are working with a partner, a written agreement can help avoid conflict. For example, Tarshus generally recommends that partnership agreements include caps on the amounts that partners can withdraw from company accounts.
“When one of the partners makes a huge transaction or a purchase, or agrees to spend a certain amount on a project, or to buy equipment, or to sell a property or to acquire a property, the other partner is sitting there, why would you do this without running it by me first? Said Tarshus. “Well, if you have a cap built into your corporate governance document, that would prevent this type of problem from happening even in the first place.”
Do some detective work
Tarshus also suggests doing a thorough background check on any potential mates and allowing your partner to monitor you, even if you think you know each other well.
“Sometimes the way people behave in the workplace is not the way they behave personally or in their circle of friends,” Tarshus said.
The process should include a previous employer check and a thorough reference check to understand how partners behave in day-to-day business situations.
“Even though you both have the same vision for a business, if a person has a different set of ethics and principles that they abide by, you might run into conflicts,” she said.
In many cases, it may be appropriate to ask your partner to share the equivalent of three years of personal tax returns.
The verification process should also include a criminal background check. Tarshus said hiring a professional firm to do this check can ensure it’s thorough. It can also protect you from liability, not to mention embarrassment.
At the very least, she said, start with a basic Google search. But don’t just type in the person’s name.
“You can also add the word ‘trial’ after their name. ” Bankruptcy “. You can get a “criminal record”, a “photo ID”. These are all keywords that will extract a lot of information. “
It is not known how many checks McStay performed on Merritt, nor how that could have affected McStay’s decision to do business with him. But a background check would have revealed Merritt had a criminal record, including two burglary convictions.
Trust your instincts
If your partner resists this type of control, that alone could be a red flag.
“You have to really trust your gut,” Tarshus said. “And if a person is unwilling to share or be vulnerable with you, or let you take a look at their privacy, then it would really give me the caution to enter into a business relationship with them, because I would be afraid that she would keep certain things a secret. “
Above all, resist the instinct to push away what may seem like an unpleasant or uncomfortable process. Tarshus said that too often business partners think their operation is too small or informal to justify such an extensive process.
“You may not be a person today, but you are trying to be. The whole point of having your business is to be successful,” she said. “And for that reason, it’s really important to make sure that you are laying a solid foundation for your business today.”
Follow the trail as investigators trace the mysterious disappearance of a young California family to Chase Merritt, who claimed his business partner Joseph McStay was his “best friend.” Watch a BRAND NEW episode of “American Greed,” Monday, February 15 at 10 p.m. ET / PT only on CNBC.