Sam Penny (00:31)
Thanks for joining me for another Built to Buy session. I'm Sam Penny. And look, if this is your first time here, I work with founders and investors who want to make smarter decisions about buying and selling businesses. Now, today's topic is one it often gets overlooked and it is so incredibly powerful though. It's called systems.
And we're not just talking about tech stacks and CRMs. We're talking about the behind the scenes machinery that tells you everything about how the business is really working. And when you're buying a business, most people fixate on financials as we all know, but those numbers are the result of something deeper. They're the systems that produce them. So today I'll walk you through how to look at a business through the lens of systems.
and what they reveal what they hide and how they help you avoid making a mess disguised as a moneymaker. So let's dive in.
So a quick bit about me, I've run companies for gee, 25 years. And in that time I've bought and I've sold companies. I've grown several from scratch. I've operated in quite a few different industries, including medical devices, beauty, food, distribution, e-commerce, done a heap of media. I've also delivered a TEDx talk, which was on why everyone should buy from regional businesses across the planet.
I've also swum the English channel and in fact, on the first person who's ever attempted to do it in winter. Stupid. I know on top of this civil engineer, once a civil engineer, got an MBA and also did a masters of entrepreneurship at MIT. Now, before we dive any deeper, I just want to take a moment to tell you about the podcast that really ties all of this together.
It's called built to sell built to buy whether you're a business owner looking to exit at a premium, or investor like everyone here today, preparing to buy your first or even your next business. This show is made for you. Each week, I unpack real strategies for increasing business value, reducing founder dependency, improving your deal flow, and building businesses that run without you. I cover both sides of the transaction.
how to sell smart, but also how to buy right. I also bring in guests, experts, stories from the field and practical frameworks that you can implement immediately as in today, whether you're in the boardroom or walking the dog. So if today's session resonates with you, and if you want to go deeper into the world of business exits and acquisitions, make sure you subscribe to built to sell, built to buy.
It's on your favorite podcast. You can listen to it on Spotify. Listen to it on Apple podcasts. Love to have you along for the ride. So just search built to sell, built to buy and hit follow. It means a lot to me. And that way you'll never miss an episode and you'll always be one step ahead of your next move. Each new episode drops Tuesday mornings.
All right, let's talk about this topic, understanding systems and really why it matters when buying a business, you see, most buyers spend 90 % of their time on the surface, you're only looking at revenue, EBITDA, customer lists, and maybe some staff BIO's but those are really just the outputs, they're the end result of how the business actually functions day to day.
You see, the systems are the inputs. They're what generate that revenue. They're what retain those customers and keep those employees engaged or not. So why should you care? Because the strength of a business isn't just in its numbers, it's in the repeatability and reliability of how those numbers are generated. You see a business with strong systems,
gives you confidence, confidence that will perform the same or even better when the current owner is gone. And confidence that your investment won't fall apart when you take over. Look, let's face it weak systems, that is a real red flag. It means the results are likely tied to people and not processes. And that means risk whether you're buying to grow hold or
even flip it, systems are your best friend. They're the blueprint, they're the safety net, and they are the leverage point. So today, we're going to uncover how to assess the systems behind the scenes and how to interpret what they say about the business that you're looking to buy. Now, here's what you can expect from today's session. First up,
We're going to start by lifting the lid on some of the red flags that show up in businesses with poor or even non-existent systems. These are the things that might not appear on a balance sheet, but they show up loud and clear if you know what to look for during your due diligence. Then we're going to move into how to assess system maturity, how evolved, documented and embedded are the systems
in the business because look, not all SOPs are created equal. Some are just written down to tick a box for yourself as a business buyer. Others are living, breathing parts of the culture. We'll also look at what great systems tell you about the culture of leadership of the business. If the systems are clear and followed, it often means that the team is empowered.
And the leadership has created real clarity. And I'll tell you what that is gold for a buyer.
So when you're evaluating a business, one of the first things that I always look at beyond the numbers is this, does it run on systems or is it held together what I call chaos? Now, what do I mean by that? A business with strong systems, it's predictable. It has repeatable processes. It has clear accountability and things get done without.
someone needing to crack the whip.
It really is a sign that the business has matured beyond the personality and the hustle. And it's scalable. On the other hand, chaos. It looks like constant firefighting. No one knows who owns what. And people are doing things differently every time. You ask how they deliver a service and three staff members are going to give you a different answer.
That's not just inefficient. It's also dangerous. I want you to paint a picture like this, driving two different cars. One has a dashboard. It's got a fuel gauge. It's got a speedometer. It's got engine lights. You know what's happening. You know, when something needs attention, that's a systemized business. the other hand, just imagine a car without a dashboard and there's random warning lights flashing and no owner's manual. You can still drive it.
but you're flying blind and eventually something's going to break. And that's because the difference between a business with systems and a business running on chaos. And as a buyer, the difference isn't just operational. It's also financial chaos costs you time, staff, customers, and ultimately money. You see,
Systems give you leverage, scalability and peace of mind.
So let's go a level deeper and let's talk about what systems actually reveal about a business, because this isn't just about operations. This is about psychology. It's about culture and it's about leadership. Strong systems show you that someone, and most likely the owner, they've taken the time to critically think about how the business should run. That there's a level of intent
behind how work gets done. Things aren't left to chance. There's a rhythm to this business, a standard, there's a structure. And when the systems are strong, you usually find three things behind them. And the first one is clear thinking. Someone's taken the time to map out what success looks like and how to get there consistently. The second is repeatable execution.
Good systems mean you get good results, not just once, but over and over. And that's how you keep customers happy. It's also how you keep margins healthy. And the third is defined accountability. Everyone knows who owns what. And I'll tell you what, there's a lot less finger pointing, there's less confusion.
And there's way more ownership. Now let's flip the round. Let's look at weak systems because they expose the cracks, not just in the execution, but the entire foundation of the business. You see signs of founder dependency where everything relies on one person's memory, their presence or their intuition. It's almost like a muscle memory that they have. And that's a huge risk. If you're stepping in as a new owner.
You're going to see team confusion and basically people making it up on the go as they go. There's no consistency. There's no leverage. And worst of all, you're going to see volatility. Revenue is going to be bouncing around. Margins are going to fluctuate and performance depends on who's working that day or even what mood they're in. as a buyer, you don't just look at this at what
systems exist, you look at what those systems are telling you about how the business has been built because they are so revealing and they reveal a whole lot more than just checklists and workflows.
So let's break it down now into something a lot more tangible. And what are the actual signs? I guess the clues that tell you whether a business has solid systems or if you're walking into a mess. Here are the five system areas that I always pay attention to when I'm looking under the hood of any business. And the first one is the sales process. And this is a huge one because is the way things like
leads are captured, they're followed up and they're closed consistently or is it random?
Just ask the team how they convert a new lead and see if everyone gives you the same answer. It's always a great way to understand how well systemized the business is. A good sales system, it creates a predictable revenue and a bad one's a gamble. It works when the star salesperson shows up or when the owner steps in. Now, the second one is fulfillment. Can they...
actually deliver what they sell reliably and without chaos. And this is where broken promises and churn usually happen. If fulfillment is a scramble, it's not just stressful, it's unscalable. A clean documented fulfillment process is one of the clearest signs of maturity. The third one is admin and finance. Now,
What I'm talking about here are things like, the books accurate? Are invoices sent on time? Is there a clear view of cashflow? If the admin side, if it's sloppy, you're going to inherit a mess and also risk. And let's be honest, poor admin is often a mask of a much bigger operational issue. Now, the fourth point is customer service. Is there a rhythm to how customers are supported?
Or is it all reactive? Are tickets tracked or does it rely on someone remembering who's angry today? And look for escalation paths, their follow-up procedures and define response times. These are the things that directly affect retention and also reputation. And let's face it, customer service is a big part of brand trust.
And brand trust is an asset of any business. And the last point here of systems signals to watch for is team communication. And look, this one's a lot more subtle, but powerful. So how often does the team communicate? it structured in how they communicate or is it really chaotic? Do they have meetings? Do they have agendas and do they have outcomes or are they just noise?
And most importantly, does everyone know what done looks like for their role? And when you dig into these five areas, you'll start to see the DNA of the business. You'll see where it's tight and where it's loose. And that gives you a massive edge as a buyer. Remember, most of these things, they're not going to show up on a profit and loss statement.
They're not going to show up on balance sheet, but when they will.
absolutely impact your experience as the new owner. And more importantly, they'll shape what the numbers look like after you take over and into the future.
Okay, red flags in due diligence. Now, now that you know what, some strong systems look like, let's flip it. Let's look at the danger signs. These are the red flags. And these are the things that should make you pause during the due diligence because while a business, might look solid on paper. These signs really point to instability beneath the surface. And the first part,
is manual undocumented workflows. If you ask, and I always love to do this, ask the staff, ask the owner, how does this process work? And the answer usually is, oh, well, it depends on who's doing it. That's a massive red flag right there. If everything lives in people's heads, it's not a shared system. means knowledge walks out the door every single time someone resigns.
Now, the second is having key people and key person risks in the operations. And this is where one person, and it's usually the founder is the glue. They're the rainmaker, the problem solver, the only person who knows how certain things get done. It might seem impressive at first, but it's really dangerous because when that person leaves the business, it doesn't.
just wobble, it collapses. Now, the third red flag is an overreliance on one team member. Even beyond the founder, beyond the owner, if the whole system hinges on one high performing employee who isn't replaceable, you got real fragility. So what happens if that person quits? What happens if that person gets
poached or even if they just go on leave, that dependency is a real value killer. Now the fourth red flag is an absence of KPIs or performance tracking. If the business can't show you how it tracks performance for things like sales, service, delivery, or really anything, that's also a problem. You can't manage what you don't measure. And as a buyer, you're flying blind.
If you can't point to metrics that matter. And the fifth red flag is a poor onboarding for staff or even clients. Ask how new hires are trained. If the answer is, we just throw them in the deep end. That kind of tells you everything. Same goes for onboarding new clients. If there's no system, it creates inconsistency. He creates frustration and churn.
These red flags don't just create short-term pain, they're signs of a long-term risk. And if you spot more than one or two, you need to either negotiate hard or even just walk away. Because remember, you're not just buying the results, you're buying the machine that makes them. If that machine is unreliable or it's undocumented,
Your upside is going to disappear really fast. Okay. Time to shift gears and talk about what you want to see. And these are the green flags. These are the markers of a business that's not just functioning well, but it's been built to last a business that's not dependent on any one person, a business that's systemized, it's scalable, and it's genuinely valuable. So first up,
are the SOPs, the standard operating procedures and also the training resources. And this is a huge one. When a business has documented processes and structured training, it means new staff can get up to speed quickly without slowing anyone else down. It also shows that the owner has thought ahead. They're not just reacting, they're building for consistency.
Now next green flag, performance dashboards. And this is about visibility. Can you as a buyer see what's happening in the business at a glance? Are there dashboards showing sales activity, customer satisfaction, financial trends, all those kinds of things. If they exist and if they're used regularly, it means the business is managed by data and not gut feel.
The next green flag is process ownership within Teams. So who owns the systems? Is it all still in the hands of the owner or has the team taken real responsibility for different parts of the machine? When team members can describe their own systems and even improve them, that's a strong culture. It's a strong cultural sign and it's gold for you as a buyer.
Fourth is an evidence of continuous improvement. So ask yourself, is this business evolving? Are there signs that the systems are updated? Tech is improved, processes are reviewed. This really shows a learning organization, one that won't fall behind or stay stuck in old habits. And the last of the green flags that drive value of a business.
and value for you as an investor, tools that create leverage. So look for automation, integrations, templates. These are simple, but really powerful tools that reduce the manual effort. They not only reduce the cost and error, they also reduce dependency. If a task is automated,
It doesn't rely on memory or mood or motivation. The tasks just get done. And every one of these green flags makes your life easier post acquisition. They reduce your onboarding time, they increase your confidence, and they often let you scale faster than the previous owner could. So if you dig
through your due diligence, and you just focus on the revenue and the profit, you need to look for these signs. These are the quiet indicators that the business isn't just profitable, it's well built. And that's all we want as a new business owner.
So here are some questions to ask the seller. Let's talk about how to get insights directly from the source, directly from the seller. You can't always see the systems just by looking at the numbers or reading documents. Sometimes the most valuable information comes directly from asking the right questions. And it's not just what they say, it's how they answer that reveals the truth.
Here's a few questions that I recommend every buyer you should ask this during a due diligence. First up, what are the key processes that are documented? And this one's really simple, but also telling if they say pretty much everything, ask to see a few. If they fumble or say it's in people's heads, that's a red flag right there. You're trying to gauge how intentional
they've been in operationalizing the business. Now, the second question I like to ask is how are staff trained and evaluated? This tells you a lot about the systems and the culture. Is there a clear onboarding path? Do staff get reviewed? there scorecards, are there checklists or even informal KPIs?
You see, if training is shadowing someone for a week, you're kind of stepping into tribal knowledge territory. The third one, what tech stack supports the operations? So what tools do they use for things like project management, their CRM, finance, team communications? This will show you both system maturity and whether they're working in silos or integrated systems.
And as a bonus, it helps you forecast post-acquisition tech costs.
And the fourth question.
How does the business track performance? Are there weekly reports? Are there dashboards? Are there monthly reviews? Or are they flying blind and checking the bank balance every Friday? You see a business without performance tracking is a business that can't course correct. And that right there means high risk.
And the fifth question to ask the seller, if the owner disappeared for 30 days, what would happen? And this is probably my favorite question because it really tells you exactly how this business is run. And it cuts straight through the smoke and mirrors.
Even ask them, where did they go on their last holiday? How long was it?
If the answer is the team would be fine, everything's in place. You're probably in good shape. If it's well, few things might slip. You need to dig deeper. The goal of these questions. It's not to interrogate. It's to understand the best deals come from insight and not assumptions and asking the right operational questions helps you see the truth behind the financials.
You have to remember that you're not just buying what the business has done. You're buying its ability to keep doing it or even do more without the current owner in the picture.
All right, here's your edge as the buyer. And this is where we all bring it all together. And it's one of the most important mind shifts I can offer you as a buyer. Most buyers, they obsess over the financials. And yes, the numbers do matter. But here's the truth, the smart buyers and the ones that get the best deals and scale the fastest, they look beyond the numbers, they look at the systems and why because
The systems tell you what the financials are likely to look like over the next quarter, over the next year, and after handover. Anyone can show you a good profit one year, especially if they're working 80 hours a week to make it happen. But show me a business with documented repeatable systems, a trained team, and processes that run without the founder.
And I'll show you business that can maintain performance long after the sale. And that right there is your edge. You're not just buying past performance, you're buying the ability to perform in the future. And systems are your clearest indicator of that. It's like buying a car. The paint job, I always like to think of that as the P &L, but the systems, that's the engine.
It's the suspension, it's the service history. It's the stuff that tells you how it's going to drive once it's yours. Most buyers get distracted by the dashboard. Your edge is looking under the bonnet.
So if you take just one thing from today's session, let it be this. When you buy a business, you're not just buying its products or its brand or even its people, you're buying its systems. It's those systems, all the lack of them that will define your experience as the new owner. They'll determine whether you spend your first 90 days growing the business or even untangling it. And
Because here's the thing, even profitable businesses can be poorly systemized. And when that's the case, every win is harder than it should be. Every handover is messy. Every growth opportunity takes three times longer to execute. But a business with a well-documented, clean systems, that's an asset that can sell. And that's something
that you can plug into, you can build on it and you can actually enjoy owning it. So before you get blinded by the top line revenue or the potential, ask yourself this, what are the systems underneath this thing really telling me? Because they'll whisper the truth. If you know how to listen to them.
All right, that's the core of what I wanted to share with you today. What's the biggest uncertainty you faced when looking at a business and what's made you hesitate or feel like you didn't have the full picture? And maybe it's because you've seen a business that looked great on paper, but felt disorganized behind the scenes, or maybe you're in the middle of a deal right now, and wondering what question should
you still be asking.
What's one thing you now realize you need to look at when assessing systems in a business. So I want you to jot it down, make it part of your due diligence checklist going forward. Because when you ask better questions,
and you listen to what the systems are telling you, you make smarter, safer and more scalable decisions. Are you going through your first deal at the moment? Have you bought businesses already in the past? It's always interesting to hear other people's experiences of what
several businesses in the past. Some have been absolutely poor and atrocious because I didn't follow my own advice. I bought some hair salons. used to have a chain of hair salons. had seven hair salons at one stage and I bought one salon where I thought everything was in place, but I clearly only scratched the surface because the owner left and set up another hair salon and
half the staff left and also half the clients. And that really destroyed that one operation, that one salon. was just ridiculous. But it was because at the time...
I didn't have the systems in place. wasn't asking the right questions.
All right, now I'm pop something up on the screen.
So 30 minute strategy call hit me up, and book in a 30 minute strategy call with me. If you're listening on the podcast, head to sampenny.com/strategy and book something in let's have a chat. Let's see where you're at. If this has really opened up your eyes to a whole new way of evaluating businesses. And if you're thinking that I want to help with this.
then this is exactly what I do inside my investor framework. It's a hands-on program for buyers who don't want to rely on guesswork or gut instinct or broker sales talk. It's for people who want to buy the right business at the right price and with confidence that it won't fall apart post-settlement. You see, we look at the big picture, but we also go deep. We unpack the operational systems, the red flags.
the financial levers and the leadership gaps. You'll learn how to structure better deals, reduce your risk and create a growth plan from day one. And if you're thinking, I don't have time to make mistakes, then this program was built exactly for you. So if you want to learn more or book a quick call with me, let's just see if we're the right fit. Head over to sampenny.com.
forward slash strategy and you'll find everything you need there. And we can have that chat, that one-on-one confidential chat. And don't forget to subscribe to the podcast, Built to Sell, Built to Buy for even more insights.
Thank you for being here today. I know we've covered a lot, but if you leave with one new lens for assessing a business, then this session has done its job. Now, our next built to buy session, it's going to be a big one because it ties directly into what we've talked about today. It's called due diligence, deep dive, reading between the lines. We're going behind the checklist and spreadsheets to uncover
how to really interpret what a business is and isn't showing you. We'll look at the subtle signals, the gaps between the numbers and how to spot what others miss. In the meantime, if this session has sparked any questions or you want to go deeper, don't forget to jump over to sampenny.com, book a call, let's have a chat. Until then, stay sharp.
Stay brave and keep buying smart.