Valuation Of Non-Compete Agreements

Competition from a former employee or seller who has not signed a non-compete agreement could prevent the company from making its expected profits or even evicting a business from the company. The value of the entire business is therefore the absolute ceiling of the value of the non-competition undertaking. Step 2: Adjust losses in Stage 1 based on the likelihood that the seller will compete in the absence of a non-compete agreement. If the consideration paid to the seller for the conclusion of a non-compete agreement is included in the total purchase price of the acquisition, there are three good reasons to assign a separate value to the seller. Non-competition bonds provide buyers with a degree of comfort, as the expected flow of profits from the business to be acquired is not disrupted by competition from the former owner. The seller benefits because the buyer is confident that the expected profits will occur and the seller will be able to maximize the purchase price. A qualified valuation analyst should be consulted when a federal state that is not competitive or intangible assets are to be evaluated. Projected cash flows after tax with non-competition Once a discount rate has been established, apply the current value factors corresponding to expected losses (stage 2) to quantify the value of the non-compete agreement. For accounting purposes, the value of this intangible asset would be depreciated over the life of the contract. A non-compete agreement is a buy and sell agreement that prevents a company`s seller from competing in that business in the future.

These agreements generally last for a specified period of time and may apply to a given geographic area (usually the area currently served by the company concerned). Competition from a former employee or seller who has not signed a non-compete agreement could eventually shut down a business. The value of the entire business is therefore the absolute ceiling on the value of competition. It is very likely that a major employee or seller could not steal 100% of a company`s profits. In addition, tangible assets have some value and could be liquidated if the transaction fails. The direct approach is to determine the present value of potential future economic damage that would result directly from the non-application of a non-compete agreement. The direct approach is a little simpler, as it involves estimating direct damage caused by competition, usually in the form of a percentage of lost revenue. This method is used more often because only an estimate of future operating results is required, making the analysis less tedious. Both methods should, if properly applied, lead to a similar value conclusion. At Henry-Horne, we have extensive experience in transaction advisory.