OUR THOUGHTS ON:

Valuing a Non-Competition Agreement

Business Advisors

By Christy Samek

Often when companies are purchased, there is an agreement with the former owner, not to compete with the purchasing company. There is potential value to this agreement, depending on the circumstances. For financial statement purposes, the non-competition agreement would be an intangible asset that would need to be valued separately from goodwill. There are two important assumptions that need to be addressed in order to determine the value of the non-competition agreement:1.) How much of the future earnings could the former owner take from the company if he/she decided to compete against the new company? 2.) What is the likelihood that the former owner would compete?

In considering the answer to the first question, you must consider the individual’s contact with customers and the loyalty of the customers to that individual. Also, you should consider the loyalty of the other employees to that individual, especially if those employees have strong relationships with the customers. Factors to consider regarding the second question - the likelihood that the individual would compete - include the following: Is it likely that the individual would be able to start another company and efficiently compete? Is it likely that the individual would be hired by a competitor? Is the individual near retirement age? Does the individual have other skills in a different industry in which he or she could find other work that is unrelated to the purchased company’s industry? Is the individual wealthy and would not need to work to provide for his or her family?

Both assumptions are important and need to be considered together. For example, if the individual could potentially take a large amount of the customers, but the likelihood that the individual would ever compete is zero, then there is no value to the non-competition agreement. Likewise, if there is a great likelihood that the individual would compete, but that individual did not have contact with customers and would not be able to take away earnings, then there is no value to the non-competition agreement.
If you need to value a non-competition agreement or other intangible assets, contact a member of Schneider Downs Advisory Group

© 2011 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

 

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

comments