The Murky Ground

A recent business section in the Wall Street Journal had the front page, top headline of, “Google Pays Up for Fake Traffic.” There are refunds going to marketing firms for ‘bot’ fraud, when ads ran on fake websites.

We all see stuff like this every day. Not advertising clicks, but the misleading information put out by many. My daughter is in the midst of a job search and tells me all the time about misleading job descriptions. She’s come to appreciate how most companies now do the first interview by telephone because she can eliminate them without taking hours to commute and meet in-person.

In the small to mid-sized business buy-sell world misleading information is common. It’s rare to see a company for sale that is not the “industry leader,” provides the “best service,” has “no serious competition,” or is not the “premier” firm in their industry.

Then we get to the numbers and boy do things get murky. First, small business accounting is nowhere close to GAAP accounting (generally accepted accounting principles). It’s more like creative accounting with misclassified accounts, no pattern of what goes into cost of goods sold, etc. Comparing margins to industry norms is virtually useless.

Then we get to all the efforts to make a business look better than it really is. I’ve written on this before (see my website for an article and video on, “AAA – not to the rescue,” about adjustments, assumptions, and add-backs to manipulate the real profit of a firm). It sometimes makes me laugh to see how few expenses some owners claim are really needed to run the business. During one recent analysis I said, “If the seller keeps this up we’ll find the business can run with no expense.”

“The hardest thing to understand in the world is the income tax.” Albert Einstein

Go to https://www.martinkaconsulting.com/media/podcasts/ for an audio version of this memo.

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