Non-Compete vs Non-Solicit Valuation
Non-compete vs non-solicit — what each restrictive covenant protects, why both are intangible assets, and how PE practitioners value each in PPA work.
Two restrictive-covenant intangibles routinely appear in M&A PPAs: non-compete agreements and non-solicitation agreements. A non-compete restricts the seller or key employees from competing with the acquired business for a defined period and geography — typically 1-5 years. A non-solicit restricts the seller from soliciting specific customers or employees — typically 1-3 years. Both are identifiable intangible assets under IFRS 3 / ASC 805 and valued via With and Without. The two are routinely combined in PPA work; the better practice splits them and values each separately.
| Criteria | Non-Compete Agreement | Non-Solicitation Agreement |
|---|---|---|
| Scope | Broad — prevents competing in the same business | Narrow — prevents soliciting specific customers or employees |
| What it restricts | Engaging in a competing business within defined geography | Approaching identified customers or employees |
| Typical term | 1-5 years post-completion | 1-3 years post-completion |
| Geographic limitation | Defined territory required for enforceability | Often unrestricted — focused on parties, not geography |
| Standard reference | IAS 38 paragraph 8; IFRS 3 / ASC 805 | IAS 38 paragraph 8; IFRS 3 / ASC 805 |
| Identifiability test | Contractual-legal — met | Contractual-legal — met |
| Valuation method | With and Without (W&W) | With and Without (W&W) |
| W&W input focus | Revenue retention, margin protection, market position | Customer retention, employee retention |
| Probability adjustment | Typically 50-80% — depends on seller's likelihood of competing | Typically 60-85% — narrower, more enforceable threat |
| Useful life | 1-5 years (contractual term) | 1-3 years (contractual term) |
| Enforceability (UK) | Strict reasonableness test — Wyatt v Kreglinger; routinely partially struck down | Generally more enforceable than non-compete |
| Enforceability (US) | State-by-state; California prohibits most; FTC rule struck down 2024-2025 | Generally more enforceable than non-compete; California limits but permits |
| Defensibility risk | Over-stating value where enforceability is partial | Under-stating value where customer / employee impact is concentrated |
When to Use Each Approach
Non-Compete Agreement
- Seller-side or key-employee restrictive covenants with broad competitive scope
- PPA work where the seller could plausibly re-enter the same market
- Deals where market-share protection is the primary covenant economic driver
- Cross-border deals where UK reasonableness or US state restrictions apply
Non-Solicitation Agreement
- Specific customer-list or employee-list protections in PPA
- Deals with high customer concentration where retention is the primary risk
- Key-employee retention agreements with embedded solicitation restrictions
- Post-completion enforcement support where breach scenarios are foreseeable
Our Verdict
Non-compete and non-solicit are different intangibles answering different questions. The non-compete protects against competitive market threat; the non-solicit protects against direct customer or employee poaching. Both are recognised under IFRS 3 / ASC 805 and valued via With and Without, but the scope, enforceability, and useful-life profile differ. Splitting them into separate intangibles in PPA work is the defensible practice.
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