Non-compete covenants are a staple in most purchase agreements. These agreements are usually designed to protect the buyer in the event that one of the selling shareholders/managers decides to pocket their deal proceeds and start a competing venture across the street.
From an accounting perspective, the value of a non-compete agreement usually doesn’t come up except in business combinations, or perhaps in litigation. In business combinations, non-compete agreements are identifiable intangible assets (per ASC 805) and may require a fair value measurement along with other intangible assets like tradenames, patents, technology, and customer relationships.
The value of a non-compete agreement can vary considerably by industry, business size, and factors specific to the individuals covered under the agreement. However, the valuation methodologies are similar whether the agreement is being valued for GAAP or tax compliance.
Matt Crow, ASA, CFA, President of Mercer Capital, spoke on the topic of valuing non-compete agreements at the 2012 ASA Advanced Business Valuation Conference in Phoenix, Arizona. The presentation covers background on non-competes, reviews key accounting guidance and tax court cases, and provides detailed valuation examples.
