It’s an expression used throughout much of the English-speaking world to describe the tendency for people to compare themselves, their wealth, and their social statuses with their neighbors, friends, and colleagues. The roots of the saying may go back to the excesses of the Gilded Age as chronicled by the famed writer, Edith Wharton. Wharton knew what she was talking about. As it turns out, her maiden name was Jones and her father’s extended family set the tone for opulent living in late 19th century New York City – everyone was watching the Joneses.
In turn, the saying gained real traction when The New York World ran a comic strip “Keeping Up with the Joneses” from 1913 to 1940. True to form, the cartoon’s McGinis family could never surpass their unseen neighbors – the Joneses.
The power of comparison visits virtually every aspect of life. From education to fashion to careers to choosing our favorite sports teams – we all look to see what others are doing and it can color our choices. People ascribe value to being better educated, better dressed, better paid, a better athlete.
The same holds true in mergers and acquisitions. During my lengthy career advising business owners on sale transactions, the desire for “better” has been on regular display. Highly successful and insightful entrepreneurs often approached their exits with expectations that were less about the actual merits of their businesses and more about how a desired outcome would position them against a standard they viewed as important – whether it was realistic or not. The consistent longing for “better” manifests itself regularly in four key ways:
- ONE: The Living Standard – For many entrepreneurs, their business touches every corner of their lives – the home they live in, the car they drive, the vacations they take, the schools their children attend. Consequently, maintaining or improving their current lifestyle is – and should be – a fundamental, threshold concern when considering a business sale. But additional challenges can mount if an owner expects a sale to radically change their standard of living. Very often, owners target a desired lifestyle and back solve for their hard sale price without regard for their company’s comparative attributes in the competitive marketplace.
- TWO: The Market Standard – In virtually any market, similar assets can command very different values due to their unique characteristics and a buyer’s particular needs. The marketplace for business acquisitions is no different. In most industries, businesses are valued by multiplying earnings before interest, taxes, depreciation, and amortization (commonly shortened to “EBITDA”) by a sector-specific EBITDA multiple within an established historical range. Readily transferable companies with highly predictable cash flows are best-positioned to fetch top-of-range multiples because they have built sustainable value. Framing deal expectations on word-of-mouth, “industry averages” or achieving “the highest multiple in my sector” is likely to disappoint an owner who hasn’t truly set the business apart through the hard work of corporate value-building.
- THREE: The Headline Standard – An old investment banking joke recounts the tale of a business owner who rebuffed interested buyers for years until one finally showed up with a truly remarkable price. The owner quickly agreed and, as they walked around the plant, informed the buyer that his price was substantially higher than past bids. The buyer merely smiled and said, “Well, we haven’t discussed the structure yet.” This highlights an important truth for business owners – the “headline” value may stoke the ego, but the true measurement of a deal is what is collected and when. Smart owners understand that an all-cash deal now may be worth far more than an incentive-laden deal with a larger price tag. So, it’s critical to go beyond the headline to understand the real story.
- FOUR: The Datapoint Standard – People naturally seek evidence to support their arguments and beliefs. But, not all evidence is created equally, and some is flimsy at best. For business owners pursuing a sale, it’s vitally important to substantiate negotiating positions with ample data. I’ve seen owners seek to highlight one great year as proof of consistent business strength. Others have tried to emphasize the multiple paid for a substantially larger, more diversified peer company to justify their valuation. Still more have insisted on favorable deal terms “that a friend got” despite the irrelevance to their specific transaction. In each case, the owners relied on single datapoints to keep up with a perceived standard. None of them won those arguments and some lost credibility with their buyers in the process.
On May 6, 1954, Roger Bannister became the first person to run a mile in under four minutes. Although his accomplishment was eclipsed in just 46 days, only about 1,400 runners have matched the feat in the past seven decades. Put another way — millions have lacked the winning recipe of opportunity, work ethic, and talent to join Bannister within that elite company of athletes.
Any runner striving for that standard must make a clear-eyed judgment about the likelihood of reaching their goal with the assets at their disposal. Business owners considering a sale are in the same spot. Unfortunately, many impose standards for their deal without really understanding if they are even attainable. The savviest owners know their strengths and work to improve their limitations. They are comfortable with not getting a record-setting multiple or an unbelievable structure, as long as they’re getting a fair deal that reflects business reality.
They don’t worry about outrunning the Joneses … and in so doing, they may even surpass them.
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