FinanceDiligence
Reverse Deduction
Also known as: Type 2 deduction, silent capture, post-close reclassification
Value the buyer finds during diligence but does not disclose — stale accruals, dead reserves, misclassified liabilities — captured silently with a post-close journal entry. The deduction the seller never sees.
WHY IT MATTERS
Most deductions in a deal are Type 1 — the buyer identifies the risk, prices it, and tells the seller. Both sides see the number. A reverse deduction is Type 2: value the buyer finds during diligence, does not disclose, and reclassifies after closing with a journal entry. Stale accruals, reserves with no remaining purpose, deferred revenue that should have been recognized, liabilities for programs that were cancelled — each one sits on the balance sheet understating EBITDA. The buyer sees them, stays quiet, and captures them post-close. At a 7× multiple, a $643K stale accrual is $4.5M of enterprise value the seller never knew was there. The only defense is a sell-side Quality of Earnings before the LOI. The seller-side QoE reads the books the way the buyer will read them and surfaces reclassification opportunities before the buyer finds them. Without one, the buyer's diligence team has an asymmetric information advantage the seller cannot detect.