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.
Introduction
Two restrictive-covenant intangibles routinely appear in M&A purchase price allocations: non-compete agreements and non-solicitation agreements. Both are contractual restrictions binding the seller or key employees post-transaction. Both have economic value because they prevent competitive harm to the acquired business. And both are recognised as identifiable intangible assets under IFRS 3 (UK and global) and ASC 805 (US GAAP).
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 post-completion. A non-solicit restricts the seller or key employees from soliciting customers or employees of the acquired business for a defined period — typically 1-3 years post-completion. The two are different in scope but commonly coexist in the same agreement.
The valuation method for both is With and Without (W&W): comparing the acquired business's cash flows with the covenant in place versus without. The mechanics are identical; the inputs differ because the two covenants protect different things. PE practitioners and PPA teams who treat the two as a single combined intangible undervalue the more enforceable component and overvalue the more challenged one. Splitting them into separate identifiable assets is the defensible practice.
TL;DR: A non-compete prevents the seller or key employees from competing with the acquired business — broader scope, harder to enforce, typically 1-5 years. A non-solicit prevents soliciting specific customers or employees of the acquired business — narrower scope, easier to enforce, typically 1-3 years. Both are recognised as 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 is to split them and value each separately based on its enforceability profile and protective scope.
Non-Compete Agreement
A non-compete agreement is a contractual restriction preventing the seller (or key employees) from engaging in business that competes with the acquired entity, for a defined period and within a defined geographic territory. Non-competes are common in M&A transactions where the seller retains operational or technical knowledge that could be deployed competitively against the buyer post-close.
What a non-compete protects
- The acquirer from direct competitive threat by the seller or key employees
- Pricing position, customer retention, and market share
- Employee retention indirectly (where competition would re-hire the acquired team)
- Strategic positioning during the integration period
How a non-compete gets recognised
Under IAS 38 paragraph 8 (UK and global IFRS), a non-compete is an identifiable intangible asset arising from contractual rights. The IAS 38 paragraph 12 separability and contractual-legal tests are both met (the second is sufficient). Recognised at fair value under IFRS 3 (UK and global) or ASC 805 (US) in the purchase price allocation. Amortised over the contractual term — typically 1-5 years.
Typical non-compete valuation
The dominant method is With and Without (W&W):
- Build the acquired business's projected cash flows assuming the non-compete is in place
- Build a parallel scenario assuming the non-compete is not in place — i.e. the seller competes
- Estimate the cash-flow differential — typically a combination of revenue retention, margin protection, and customer-retention preservation
- Discount the differential to present value over the covenant term
- Apply a probability adjustment reflecting the likelihood of the seller actually competing absent the covenant
Enforceability considerations
UK courts apply a strict reasonableness test to non-compete clauses (Wyatt v Kreglinger and Fernau [1933]; reaffirmed in subsequent cases). The covenant must be:
- Necessary to protect a legitimate business interest
- Limited in duration to what is reasonable
- Limited in geographic scope to what is reasonable
- Limited in subject matter to what is reasonable
UK non-competes are routinely partially unenforceable where the scope is too broad. US enforceability varies by state — California prohibits most non-competes; other states permit them with reasonableness tests similar to the UK. The 2024 FTC rule banning most US non-competes was struck down by federal courts in 2024-2025; the legal landscape remains state-by-state.
A UK technology business is acquired for £45m. PPA identifies a 3-year non-compete agreement with the founder-CEO. The W&W analysis estimates that, absent the non-compete, the seller would compete in the same niche, capturing 25% of customer base over 18 months and producing 12% margin compression. Discounted at the deal WACC of 11.5%, the differential cash-flow protection is £2.8m. Probability adjustment of 75% (reflecting likelihood of actual competition) gives a non-compete fair value of £2.1m, amortised over 3 years at £700k per annum.
Non-Solicitation Agreement
A non-solicit (non-solicitation) agreement is a contractual restriction preventing the seller (or key employees) from soliciting specific groups — typically customers, employees, or both — of the acquired business, for a defined period. Non-solicits are narrower than non-competes; they do not prevent the seller from operating in the same industry or location, only from approaching specific identified parties.
What a non-solicit protects
- Customer retention — the seller cannot poach acquired customers
- Employee retention — the seller cannot poach acquired employees
- Customer-relationship continuity during the integration period
- Specific high-value relationships identified in the agreement
How a non-solicit gets recognised
Same framework as the non-compete: identifiable intangible asset under IAS 38 paragraph 8, recognised at fair value under IFRS 3 / ASC 805, amortised over the contractual term. Typically 1-3 years.
Typical non-solicit valuation
The W&W method applies, but the inputs differ from the non-compete:
- Build the acquired business's projected cash flows assuming the non-solicit is in place
- Build a parallel scenario assuming the non-solicit is not in place — i.e. the seller solicits the identified customers or employees
- Estimate the cash-flow differential — focused on customer retention (or employee retention) over the covenant term
- Discount to present value over the covenant term
- Apply a probability adjustment reflecting the likelihood of solicitation absent the covenant
Enforceability considerations
Non-solicits are generally more enforceable than non-competes because they restrict a narrower scope. UK courts apply the reasonableness test but rarely strike down non-solicits where the customer or employee list is identified and the term is moderate. US state-level approaches similarly distinguish: California allows post-employment non-solicits (subject to limitations); states that prohibit non-competes generally permit non-solicits with appropriate scoping.
The narrower scope makes the W&W estimate more defensible — the seller's potential damage to the acquired business is more readily quantified (specific customer relationships, identifiable employee groups) than the broader competitive threat from a non-compete.
Continuing the technology example. The same agreement includes a 2-year non-solicit covering the top 30 customer accounts (representing 60% of revenue) and the engineering team of 22. The W&W analysis estimates that, absent the non-solicit, the seller would actively poach key customer accounts producing 30% customer churn over 12 months, plus departure of 8 engineering team members increasing replacement costs by £400k. Discounted at 11.5%, the differential is £1.6m. Probability adjustment of 70% gives a non-solicit fair value of £1.1m, amortised over 2 years at £550k per annum.
Side-by-Side Comparison
The table below contrasts the two restrictive-covenant intangibles for PPA practitioners.
| Criterion | Non-Compete | Non-Solicit |
|---|---|---|
| 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 |
| Recognition trigger | Acquisition (PPA) | Acquisition (PPA) |
| 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) |
| Amortisation | Straight-line over contractual term | Straight-line over 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 |
| Combined treatment in PPA | Often combined with non-solicit in a single intangible — but better practice splits them | Often combined with non-compete in a single intangible — but better practice splits them |
| Defensibility risk | Over-stating value where enforceability is partial | Under-stating value where customer / employee impact is concentrated |
| Audit focus | Reasonableness scope, W&W differential support, probability adjustment | Customer/employee identification, W&W differential support, probability adjustment |
Why splitting the two matters in PPA
The case for splitting non-compete and non-solicit into separate intangibles is practical:
- Different enforceability profiles. A 5-year non-compete in the UK has higher enforceability risk than a 2-year non-solicit. Combining them in a single intangible obscures the risk-adjusted value of each.
- Different useful lives. Non-compete useful lives are typically longer than non-solicit useful lives. Combined amortisation misses the timing profile.
- Different W&W inputs. Non-compete differentials reflect competitive market share; non-solicit differentials reflect customer/employee-level retention. The inputs are different even where the outputs land in similar magnitudes.
- Cleaner audit trail. Auditors find combined non-compete-and-non-solicit intangibles harder to test than separated assets. The PPA documentation is cleaner when each is independently evidenced.
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.
Why the Distinction Matters
Three areas drive the practical importance for PE practitioners and PPA teams.
Deal modelling and value attribution. PE buyers building integrated deal models need to attribute value to each restrictive covenant separately. A 5-year non-compete with partial enforceability in the UK is a different asset from a 2-year non-solicit with full enforceability. Combining them obscures the risk-adjusted attribution and produces less reliable deal economics.
Post-completion enforceability decisions. If a seller breaches one but not the other (for example, sets up a competing business but does not actively solicit customers), the acquirer needs to know which covenant has been breached and whether the remedy is available. The combined-intangible approach makes this analysis harder; the separated approach supports it directly.
Cross-border deal complexity. A UK acquirer of a US target faces different enforceability regimes for each covenant by state. A US acquirer of a UK target faces the UK reasonableness test. Cross-border deals routinely involve restrictive covenants that are enforceable in one jurisdiction but not in another. Separating non-compete and non-solicit makes this jurisdictional analysis tractable.
A PE firm acquired a UK technology business in 2024 with combined non-compete and non-solicit intangibles totalling £3.2m in the PPA. The 5-year non-compete and 2-year non-solicit were valued as a single asset. In 2025, the seller set up a competing technology business in the same niche — clearly breaching the non-compete. The acquirer initiated enforcement action and discovered the non-compete had been partially struck down by the UK court (5-year term reduced to 2 years for reasonableness). The damages claim relied on the non-compete value, but the combined intangible made it harder to separate the breach impact from the still-intact non-solicit value. A subsequent re-statement of the PPA, splitting the non-compete (£1.6m) from the non-solicit (£1.6m), enabled cleaner damages quantification but came too late for the enforcement case.
FAQ
What is the difference between a non-compete and a non-solicit?
A non-compete prevents the seller or key employees from engaging in a competing business within a defined period and geography. A non-solicit prevents the seller or key employees from soliciting specific customers or employees of the acquired business within a defined period. Non-compete is broader (industry-wide); non-solicit is narrower (party-specific). Both can coexist in the same agreement.
Are non-competes enforceable in the UK?
Yes, but only to the extent they are reasonable. UK courts apply the Wyatt v Kreglinger reasonableness test: the covenant must protect a legitimate business interest and be limited in duration, geographic scope, and subject matter. Excessive scope on any dimension can result in partial or full unenforceability. Five-year UK non-competes are routinely struck down or read down to shorter terms.
Are non-solicits enforceable in the UK?
Generally yes, with fewer enforceability issues than non-competes. The narrower scope (specific customers or employees rather than entire industries) makes the reasonableness test easier to satisfy. UK courts routinely uphold 1-3 year non-solicits where the protected parties are identified and the term is moderate.
How is a non-compete valued?
The dominant method is With and Without (W&W). The valuer builds projected cash flows with the covenant in place, then with the covenant absent, and calculates the differential. The differential is discounted at the deal WACC over the covenant term and adjusted for the probability of actual competition absent the covenant. Common probability adjustments are 50-80%.
Should non-compete and non-solicit be valued together?
The standard PPA practice has often been to combine them in a single intangible. The better practice is to split them. They have different scopes, different enforceability profiles, different useful lives, and different W&W inputs. Splitting them produces a more defensible PPA, supports post-completion enforcement decisions, and clarifies the value attribution.
What is the typical useful life for these covenants?
The useful life is the contractual term. UK non-competes are typically 1-5 years; UK non-solicits are typically 1-3 years. The amortisation is straight-line over the contractual term. Where the term is partially struck down by a court, the useful life is shortened to the enforceable period — typically prompting a partial impairment of the related intangible.
How did the 2024 FTC non-compete rule affect US PPA work?
The FTC's April 2024 rule banning most US non-competes was struck down by federal courts in August 2024 and the issue remains under appeal. The practical effect on PPA work was minimal — US PPA teams continued to recognise non-competes where they were enforceable under applicable state law. The state-by-state pattern remains the operating framework.
Can non-solicit value exceed non-compete value?
Yes, particularly where customer concentration is high. A non-solicit protecting 30 top customers representing 60% of revenue can carry more value than a non-compete protecting against generic competitive entry. The W&W differential is asset-specific — the customer-retention differential often produces larger numbers than the broader competitive-market differential.
When to Seek Expert Support
Restrictive-covenant valuation sits at the intersection of accounting, deal modelling, and enforceability analysis. Edge cases — multi-year non-competes facing UK reasonableness challenges, cross-border deals with mixed enforceability regimes, key-employee retention agreements with embedded restrictive covenants, and post-completion breach scenarios requiring fair-value reassessment — typically warrant specialist input.
Opagio's Asset Valuator module (within Opagio Intangibles) supports With and Without method work for both non-compete and non-solicit intangibles separately. Inputs are captured for each covenant: the protected scope, the W&W cash-flow differential, the probability adjustment, the contractual term, and the enforceability profile. The model produces audit-trail-ready outputs structured for IFRS 3 / ASC 805 disclosure, with the two intangibles cleanly distinguished in the PPA report.
For PE deal teams building integrated models, the separated approach supports the deal-economics decisions: which covenant carries which value, and how the risk-adjusted attribution responds to enforceability changes.
Book a demo: See how Asset Valuator structures With and Without method work for non-compete and non-solicit intangibles separately, with audit-trail documentation for each. Book a demo or speak to our team.
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