It may be important to determine the value of a non-compete agreement in many situations. B for example in a commercial transaction or sale, or for financial or tax reporting purposes. Professional evaluators can use different methods to assess these intangible assets. In the case of the transactions of the M-A, it is common practice for the acquired company to cede all contractual rights to the purchaser. This may sound theoretically good, depending on the wording of the underlying contracts, but they may have little or no value to the buyer. As confirmed by the Massachusetts Superior Court`s decision in NetScout, Inc. Hohenstein, this caution may be particularly important when the underlying contract concerns a non-competitive worker. Once a discount rate is determined, apply the current value factors corresponding to the expected losses (stage 2) to quantify the value of the non-competition agreement. For accounting purposes, the value of this intangible asset would be depreciated over the life of the contract. Note 4: If this is the estimated annual economic loss that is likely to occur if a competition agreement is not entered into between a former employee or seller who has not signed non-compete obligations, a company may be able to expel him from the 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. 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. The third step is to determine the present value of the economic damages avoided during the duration of the non-competition agreement. Non-competition agreements help companies retain quality employees, protect inside information and prevent unfair competition. But while they are designed to protect businesses, they can also put them at great risk if they are not properly structured and maintained. This step involves determining an appropriate discount rate to calculate the current value of expected losses. Consider the weighted average cost of capital (WACC) used to finance the acquisition as a starting point. In general, cash flows from intangible assets are more risky than those related to tangible assets. This additional risk would generally support a higher return to compensate the investor. However, since much of the risk in cash flow has already been eliminated by the probability adjustment (stage 2), it is unlikely that a significant risk premium (applied to the CMPC) will be appropriate. The second step is to determine the “expected value” of losses on the basis of a probability assessment that takes into account the likelihood that the seller will compete with the acquired transaction.
Predictable after-tax cash flows with non-competition obligation If the buyer is a company, generally accepted accounting standards (GAAP) 1 require that the parent company`s annual accounts be consolidated with those of its subsidiary. Depending on jurisdiction, these accounting rules have specific standards2 under which a buyer must allocate the total purchase price paid in connection with a business combination to the fair value of all tangible and identifiable intangible assets recorded (including the non-compete prohibition agreement).