Wework infamously reported “Community Adjusted EBITDA” as an ultimately fake measure of profitability. Unfortunately, I’ve noticed that many ecom brands report what I’ve taken to call “DTC Adjusted EBITDA.”

It’s also not real.

DTC Adjusted EBITDA is a collective set of accounting choices that allow brand owners to lie to themselves about how profitable their business really is. After almost 3 years of diligencing and acquiring DTC brands, here are some of the most common issues I’ve seen:.

Failing to write off inventory

Most DTC brands launch new products semi-regularly. This is especially true for apparel brands, who frequently debut new styles. But other types of brands also launch products in new categories or updated versions of existing products.

It’s impossible to predict with 100% accuracy what new products are going to succeed. But it’s generally possible to know with certainty that not all new launches will succeed. And that’s OK.

But it also means that the cost of goods and transport for the inventory that a business buys but cannot sell for more than it costs needs to be accounted for somewhere. So many brands just never write off that inventory and let it sit on their books indefinitely.

But this isn’t a fair accounting of a brand’s costs. If on average you end up buying 20% more inventory than you sell, you need to account for all of the inventory purchased. The amount spent on obsolete inventory is a real cost.

One time costs

I’ve seen many brands argue that certain costs on their P&L are “one time” and so shouldn’t count against their profitability. While this is definitely used as a tactic when trying to value a business in a sale, I’ve realized that many operators truly do not consider certain “one time” costs to fully count.

For example, a “brand refresh” may be a one time cost, but it counts. Why? Because of course every company has non-recurring costs from year to year. If you just don’t count the ones you happened to have had in the last year, you’re fooling yourself about your true profitability because you’ll have different one off costs next year.

Improper cost capitalization

This one’s a bit rarer but I’ve seen it many times. Certain brands will capitalize costs that are definitely costs, not capital investments.

For example, I’ve seen several brands capitalize part of their Meta spend. The faulty logic is that some of the Meta spend is going towards building a long-term brand and so is an investment, not a cost.

This…is crazy. On this logic, basically every cost could be considered an investment. Even the cost of producing goods is a part of building a lasting brand–why couldn’t you capitalize COGS too?

At the end of the day, WeWork went bankrupt because they weren’t profitable. Tracking “Community Adjusted EBITDA” just helped them deceive themselves about that fact.

DTC brands shouldn’t fall into the same trap. Know your true profitability.