Review Your Business Externally and Internally, Prepare the Sale Memorandum



The Sale Memorandum is a key document in the business sale process. It’s the written review of the business that prospective buyers seek.

In order to put the "flesh on the bones” of this document it’s necessary that you assess the external trading environment and undertake an internal performance review. To pick out a few key facts that will persuade a prospective buyer to go to the next stage of the purchasing process.

If you like, it’s an audit, although not in the same forensic-like manner of an accountant. It can be as detailed as you wish, but more importantly it requires a clear focus on the purpose, in this case completion of the corresponding sections in the Sale Memorandum.

It’s also an opportunity to anticipate specific questions a buyer may ask later in the process, enabling you to think of good answers and to map out your tasks in preparation for Due Diligence, which takes effect once a firm buyer has been identified.

As a checklist, the business areas where audits are typically conducted include:

  • Marketing
  • Sales
  • Finance
  • Staff
  • Operations
  • Logistics
  • Innovation and new products
  • Customer service and satisfaction

This How-to Guide, that suggests you participate in a number of practical activities, covers the following topics:

  1. Inputs to the Sale Memorandum
  2. Checking key external trends
  3. Clarifying your Business Model
  4. What, specifically, makes your business stand out from the competition?

Let’s take each of these sections in turn:

1. Inputs to the Sale Memorandum

ExitAdviser’s Sale Memorandum tool takes a practical approach designed to make completion of this important document as easy as possible for you. There’s a specific How-to Guide to explain how to use the tool, so here we concentrate on gathering the right information inputs.

It’s important to pay particular attention to the following parts of the Sale Memorandum.

Under the "Brief Business Highlights” section:

  • Product or service (your offer)
  • Main promotional methods
  • Customer profile (related to the chosen segments)
  • Main advantage(s) over nearest competitors
  • Key market facts, prioritizing market size, the trend direction, and market share
  • Staffing
  • Sales channels used

The specifics of the "Key financial facts and forecasts” (absent from the above list) is covered in a separate How-to Guide.

With the "Future developments” section of the Sale Memorandum:

  • The main business opportunities
  • The challenges and risks
  • New or emerging competitors
  • Improvement actions already taken

In addition the research and analysis you do will have an important bearing on the accuracy of forecasts used in the Business Valuation Tool (BVT). The more you know about these external and internal factors, the better you’ll be able to justify your assumptions made in the BVT.

Due Diligence is also a very detailed process requiring you to have the relevant facts and figures available to the buyer or their representatives.

2. Checking key external trends

It’s important for any business to understand emerging trends and their implications for the future, both positive and negative, in order not to be caught unawares.

A business owner reviewing his business externally and internally
A business owner reviewing his business

The natural start point is a short synopsis of the current trading conditions facing the business.

It’s good practice to use a number of different information sources before drawing conclusions, or at the very least utilize the most authoritative source you can find. On occasions you may require "proxy" data, or parallel indicators, which may be the nearest you can get to market size and share data.

Here’s an exercise you can easily do with your colleagues. Take a large sheet of flipchart-sized paper and packs of "Post-it” notes (you may wish to use different colors).

Turn the paper to landscape view. Make five columns and write these following bold headings in order along the top of the paper:


  • Competitive rivalry (among existing suppliers – How many competitors? How intense is the rivalry? What impact does this rivalry have in practice on trading conditions?)
  • Determinants of buyer power (the balance of overall product or service supply versus overall customer demand in your product category - plus any other relevant factors impacting current and future bargaining positions and profits)
  • Determinants of supplier power (particular for key business costs - for example labor, equipment or materials, which also present challenges for your main competitors)
  • Threat of substitutes (buyers always have different ways of satisfying their needs - including the "do nothing” option” - so what are these alternatives in your market space?)
  • Threat of new entrants (depending on the deterrence factors specific to your sector, for example, high start-up capital, licenses – similarly, exit by existing competitors may be deterred where major investments have been made)

The structure and notes are based on the pioneering "5 Forces” work of Michael Porter, the World-renowned American business thinker.

Attach the paper to a wall. Ask your team to jot down their individual thoughts under each of the headings, one idea per Post-it note. Take care not to make suppositions. If you’re unsure of the facts, or lack the evidence, note down an action point for further research.

Stick the individual Post-it notes under the appropriate headings on the paper. Look for common patterns in the content so that you can group Post-it notes together.

Now take a look at PEST(L)E, an abbreviation for the following trend factors:

  • Political/Legal
  • Economic
  • Sociological
  • Technological
  • Environmental

Go through the same process, again using Post-it notes, to check for emerging trends likely to affect your business. This exercise covers all five PEST(L)E headings. As you do it, mark each Post-it note with a code to identify each trend type. The objective is not to miss anything that might be important, so think as broadly as you can.

Now stick the Post-it notes under the "5 Force” column where you think the trend is expected to impact most. You can duplicate a Post-it where you feel the trend impacts strongly on more than one force. Again look for patterns, grouping the Post-it notes.

From these two exercises a picture should start to emerge about what’s important, both now and into the future. Some trends are likely to present opportunities, some threats, others both. 

Think about the implications on the business and how you, if you were staying on, would take advantage of the opportunities and counter the threats. It’s good to summarize your conclusions in a few short paragraphs or bullet points, adding to this when your follow-up research is complete.

Now check back over Section 1 above before going to the Sale Memorandum tool to complete the relevant external business review questions. You can also update existing business plans with the new information.

3. Clarifying your Business Model

The Business Model describes the way a business creates, delivers and captures value.

The most visual approach is the Business Model Canvas (see diagram below), described in the "Business Model Generation” by Alexander Osterwalder and Yves Pigneur.

Business model canvas with 9 building blocks

Osterwalder's approach splits the visual Canvas into two halves (a line down the center of the above diagram), one for value and one for efficiency. Think of two containers with four elements in each. Resting on top of the two containers is the central element in the Canvas, namely the Value Proposition, which has both value and efficiency characteristics.

The Value Proposition, or offer, shows how you create value in the mind of your customers, through a bundle of product benefits. The key questions are:

  • Do you primarily solve a customer problem or satisfy a customer need, or both?
  • Do you achieve this by offering the same package of benefits as competitors but at a lower price?
  • Or, like most small businesses, provide a similar offer to the competition but with additional features and attributes (for example, better performance, specific customization to suit individual need, ongoing product servicing, superior design, reducing customer costs or risks, being more accessible than others, or just an offer that is more convenient, or easy to use).

In the Business Model, the value side looks at:

  • Customer Segments - that you service
  • Channels - used to access your customer segments
  • Customer Relationships – how you conduct these
  • Revenue Streams – that flow into the business

Efficiency areas specifically look at:

  • Key Resources - that you use within the business
  • Key Activities - delivering customer value
  • Key Partnerships - that further leverage your capability
  • Cost Structure - of the business

This gives you a useful checklist for your internal assessment. It’s advisable to take notes as you go through and conduct further investigation where needed.

So taking the four value-based elements:

  • Customer Segments, the distinct customer group(s) you serve that requires a different offer through a tailored Value Proposition, Distribution Channels and Customer Relationships – small businesses typically bypass the mass market, so the issue becomes the degree of offer specialization required to focus on the specific needs of a niche market, as opposed to adapting the offer to satisfy more than one segment, each with slightly different customer needs
  • Channels, identifying the different direct and indirect routes you use to access customers, either through your own activities or in conjunction with your partners – mapped against your specific conversion challenges faced (to create basic awareness among target customers; help them to evaluate your Value Proposition; make the offer easily available once the buying decision has been made; deliver the offer in a timely fashion; and any post purchase service and support that keeps customers satisfied so that they repeat purchase)
  • Customer Relationships, that you have with each customer segment served and whether your key challenge is acquiring new customers or retaining existing ones (or getting them to buy more from you) – so, do you: use your own staff to communicate directly with customers?; or provide personal, tailored customer service?; or automate all or some of your processes?; or have communities of customers allowing exchange of information; or are your customers directly involved in giving feedback on your service or the design of your products?
  • Revenue Streams, which are dependent on your pricing structures, perhaps from a fixed menu list price, with possible variations according to the number or quality of Value Proposition features, the characteristics of the Customer Segment, or volume purchased – as opposed to dynamic pricing based on market conditions through negotiation, stocks available at the time of purchase or as a result of supply and demand, or through competitive bidding – revenues could be due to selling ownership of the product, temporary rental/leasing, usage fees, subscriptions, licensing, brokering fees or advertising

Now looking at the four efficiency considerations:

  • Key Resources, the physical, financial, human, intellectual (for example, your brand, customer database, copyrights) inputs that create your Value Proposition and make your Business Model work, whether owned, leased or obtained from key partners the configuration of these resources depends on your chosen Business Model
  • Key Activities, the sister of your Key Resources above, and the ones that add most value to customers – these also differ depending on your Business Model type – whether you produce something, providing solutions to customer problems, or are dependent on network or platform related activities
  • Key Partnerships, including your main suppliers (and any buyer-supplier relationships assuring preferential supply), strategic alliances with non-competitors, or competitors, and any new business joint ventures (for the purpose of: optimizing your resource allocation and activities; reducing costs by "buying” rather than "making” or sharing facilities to reduce risk or allow you to concentrate on your core value creating activities)
  • Cost Structure, typically the summation of your Key Resource, Key Activity and Key Partnership costs and dependent on whether your Business Model is primarily driven by reducing costs or adding value to your customer offer – costs divide into fixed and variable and are typically impacted favorably by volume economies of scale or through sharing fixed costs across more than one offer.

Based on the information gathered and your analysis you should now be in a good position to go back to the Sale Memorandum and complete further sections.

4. What, specifically, makes your business stand out from the competition

By now you should be well on the way to completing your Sale Memorandum.

This specific section, covering the "Main advantage(s) over nearest competitors" question, has been separated from the others for emphasis, because it'll be so crucial in the buyer’s assessment of your business.

It’s your main advantage(s) over the competition. The bracket around the "s” is deliberate because in reality most businesses have very few significant, differential strengths over the competition. And, as the buyer will know this, it's important not to overstate your case in the Sale Memorandum.

Far better to highlight the one, two, or three (at most) factors that really make the difference, and be ready and prepared to defend your position with the facts. It’s the culmination of all the other information and analysis. The ultimate driver of superior profit performance in the business, compared with your closest competitors, as reported in your financial statements (financial aspects are covered in a separate How-to Guide).

For further help with identifying you competitive advantage take a look at the "How attractive is your business to buyers” in the Go to Market stage of ExitAdviser. This further explores the demand-side Value Proposition, alongside the configuration of your supply-side Value Chain activities.


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