The Exit Ready Series · Post R.13
View the full series →The Reverse Deduction
Founders prepare for what the buyer will deduct. They do not prepare for what the buyer will quietly take.
In Q1 of his exit year, Ed Kowalski's sales team built a rebate campaign. Buy a full pallet of the high-margin SKU before year-end, get 8% back in Q1 of the following year. Standard play. They had run versions of it before.
Finance did its job. Janet, the controller, started accruing the liability the day the campaign was approved.
By the end of March, the Sales Manager, Marcus, decided not to run it. The pipeline was strong without it. Margins were better without it — and Marcus got paid on margin. He moved on.
He never told Janet.
The accrual kept building. By the end of September, it sat at $643K — a liability for a campaign that had been dead for six months.
The accrual sat on the books for the rest of the year, through diligence, through closing, through the wire. Nobody flagged it. Nobody reversed it.
The buyer's diligence team found it in week three.
They did not ask about it.
The journal entry that moved $4.5M
Six weeks after closing, the buyer's new finance team reversed the accrual. A $643K liability became a $643K reduction in expense. At 7×, the buyer captured $4.5M in valuation — silently, with a single journal entry.
Ed never knew. He could not have known. He was not looking.
This is The Reverse Deduction. The line item the buyer finds in diligence, does not disclose, and reclassifies after closing. Value the seller did not know was there.
Two types of deductions
Every other finding in this series is a Type 1 deduction — value the buyer subtracts at the negotiating table. The buyer identifies the risk, prices it, and tells the seller. The seller concedes or fights. Either way, both sides see the number.
A Type 2 deduction never reaches the table. The buyer finds an asset misclassified as a liability, or a reserve with no remaining purpose, or deferred revenue that should have been recognized. The buyer stays quiet. After closing, a journal entry moves the number.
Type 1 deductions cost Ed $3.5M across twenty-one findings. One Type 2 deduction cost Ed $4.5M. He never saw it coming.
The asymmetry is structural. The buyer's job during diligence is to find every way the books can be read in the buyer's favor. Some of those readings get raised. Some don't.
Why founders never see it
A tax-built set of books and a sale-built set of books are not the same thing. We covered this in The Books That Built the Business Won't Sell It. Tax-built books are designed to be conservative — accrue early, recognize late, leave reserves intact. Year after year, items pile up that nobody revisits because nobody has a reason to.
The rebate accrual is exactly that kind of item. It was a real liability when it was booked. It stopped being real the day Marcus killed the campaign. But the books are not built to ask that question.
A seller-side Quality of Earnings would have caught it. The seller-side QoE is the only mechanism a founder has to read the books the way the buyer will read them. With a seller-side QoE in hand, Janet reverses the accrual herself. The EBITDA goes up by $643K. At 7×, that is $4.5M in deal value that lands in Ed's pocket instead of the buyer's.
Without one, the buyer finds it. The buyer does not disclose it. The buyer takes it.
Four months after closing, Janet was still running the finance function under a transition-services agreement. The new owners had brought in their own controller above her, but the day-to-day still flowed through Janet.
In February, the new controller asked her to reverse the rebate accrual. Janet pulled the file, made the entry, and watched a $643K liability turn into a $643K reduction in expense.
She knew exactly what she was looking at.
The next week she met Ed for lunch. Halfway through, she put down her fork.
"They reversed the rebate accrual."
Ed did the math at the table.
What this cost Ed: $4.5M.
The Reverse Deduction sits outside the deduction list. It is not a negotiated concession. It is not a risk discount. It is value the buyer found on Ed's books and captured silently after closing.
The rebate accrual — $643K for a campaign that never ran — sat on the balance sheet through the entire deal process. At the 7× multiple, the buyer's post-close journal entry moved $4.5M in enterprise value from Ed's column to theirs. No term sheet. No negotiation. No disclosure.
The deduction list captures what the buyer subtracts. The Reverse Deduction captures what the buyer takes. They are not the same number and they do not live in the same column.
A seller-side QoE before the LOI would have surfaced the accrual. Ed would have reversed it himself. Instead, Marcus did not tell Janet, Janet did not flag it, the buyer's team found it in week three, and ninety days later they captured $4.5M in value.
Don't be Ed.