Assessing Business Systems and Processes Before You Buy
Whilst financials are important when buying a business, arguably one of the most important aspects of a business is its systems and how well it operates. Especially when you are buying a business and the current "big boss" is stepping away. You need to know... will this business continue to operate successfully...
Business owners need to avoid the curse of dependency. A business that depends on the continuous intervention of the owner (or key employees) rarely operates effectively over the long term. It quickly becomes a burden for the owner leading to stress and burnout.
How does a business owner avoid this?
As Michael Gerber wrote in his classic The E-Myth: Why Most Small Businesses Don’t Work and What to Do About It, “The system is the solution”.
The quality of the business’ systems will affect the success of the business. Think of any successful franchise. They will always have high-quality systems for franchisee businesses.
So, if you are considering buying a business, assessing the quality of the systems should form part of your due diligence to avoid chaos in the future.
Here’s what to look for:
1. Documentation
Ask for documentation on all procedures and check if they are regularly updated and followed. A lack of standard operating procedures (SOPs) might show that knowledge is stored in the owner’s or key employees’ heads rather than accessible documents. This can be risky if these staff members leave.
2. Operational Efficiency
Consider how the business handles core operations. Are processes streamlined, or are there obvious bottlenecks? Also, if a business has overly complex processes, consider whether you need to simplify or restructure them if you buy the business.
3. Technology and Automation
These days, technology plays a significant role in the efficiency of any business. Review the business's tools and software to assess how well technology is integrated into the business systems. Older or poorly integrated technology can be costly and inefficient, especially if it doesn’t support the business’s current needs.
4. Customer Service and Sales Processes
A critical system that deserves special attention is how the business engages with its customers. Clear processes for handling inquiries, complaints, and follow-ups can significantly impact customer satisfaction and retention, which is especially valuable if the business relies on repeat customers.
Marketing and sales processes should also be well-defined. Review the documented sales strategy and the marketing function. These systems are integral to the future profitability of the business.
5. Compliance and Risk Management
Not complying with regulations can result in fines, reputational damage, or worse. Assess the business’s compliance systems, including how it handles health and safety, data protection, and industry-specific regulations.
Effective compliance systems reduce risk and demonstrate the business’s commitment to ethical operations.
6. Employee Recruitment, Training and Development
Assess how the business manages these HR functions. Well-implemented recruitment and training programs ensure employees are up-to-date on best practices and can perform their roles effectively. If training is inconsistent or poorly documented, it could lead to skill gaps that affect productivity.
Also, look for documented onboarding processes for new employees and ongoing training. Effective systems in this area show that the business is committed to maintaining a skilled workforce, which is crucial for long-term success.
You've Checked, So What Now?
Just because a business “fails” your systems review, don’t abandon your consideration of the business.
You may find the “perfect” business but they are rare. Most businesses will have something about them (like faulty systems) that gives you cause to pause.
You need to consider the systems and their impact when assessing the value of the business to you. Faulty systems may be an opportunity to buy at a discount, but only if you are confident you can “fix it”.
Inevitability, another potential buyer will have a different view of the systems and assess the business value differently.
Final Thoughts
Evaluating the systems and processes before buying a business is key to understanding its operational health. Strong systems can make your transition smoother and increase the value of the business.
As Michael Gerber also said, “Systems permit ordinary people to achieve extraordinary results, predictably”.
Wouldn’t that be ideal for your new business?
Tags: buying a business acquisitions systems processes
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