Why would you need to put a dollar value a non-compete agreement? And how would you go about doing it?
There could be any number of reasons to put a value on a for financial reporting purposes, it is sometimes necessary to put a value on a non-compete agreement as part of a purchase price allocation. Alternatively, the value of noncompetition agreement may be relevant for court purposes as part of a lawsuit.
Putting a value on a non-competition agreement can be either relatively simple or very complex. Essentially, it is an exercise is putting together a discounted cash flow model that calculates the present value of the business retained by obtaining the signature of the party bound by the non-compete agreement.
How to value non-compete agreement
Factors necessary to consider when putting such a model together include, but are not necessarily limited to:
- The party's ability, likelihood and inclination to compete absent a non-competition agreement.
- The cash flows expected to be lost as a result of the party competing, either through lost sales, increased expenses, or a combination of the two.
- The geographical area covered by the non-competition agreement.
- The length of time the non-competition agreement lasts.
- Other barriers to entry in building a competing business.
Obviously not all non-competition agreements are created equal and their corresponding value are not either. Make sure you carefully consider the facts of the agreement, as well as the facts surrounding the agreement before trying to value a non-competition agreement. Also, make sure that those facts are adequately represented by the assumptions inherent in the model used to value the agreement. And, as always, if you need help, we stand ready to assist.