A non-competition agreement (NCA) is a contractual arrangement that restricts one party — typically a seller, key employee, or former business partner — from competing with the acquirer for a specified period within a defined geographic area. In M&A transactions, NCAs protect the acquirer's investment by preventing the seller from immediately establishing a competing business and recapturing the customers, employees, and market position that were just acquired.
Under IFRS 3, non-competition agreements are classified as marketing-related intangible assets because they protect the commercial environment in which the acquired business operates. They must be separately recognised at fair value when they are material to the transaction.
The valuation of NCAs is inherently speculative — it requires estimating what would happen if the agreement did not exist. This makes the With-and-Without (W&W) method the natural valuation approach.
The W&W method values a non-competition agreement by comparing two scenarios:
With scenario: The business operates with the NCA in place. The seller cannot compete, and the business retains its customers, employees, and market position as projected.
Without scenario: The business operates without the NCA. The seller is free to compete, and the business experiences some degree of customer loss, employee attrition, and revenue decline as a result.
The fair value of the NCA is the present value of the difference in cash flows between these two scenarios, discounted at an appropriate risk-adjusted rate.
Project the business's cash flows assuming the NCA is in force. This is typically the management case or the acquirer's base projection.
Assess the likely impact if the seller were to compete. Key factors: probability of competition, market share erosion, customer switching likelihood, and price pressure.
The difference between With and Without scenarios represents the economic benefit of the NCA.
Apply a risk-adjusted discount rate over the remaining term of the NCA to arrive at fair value.
The Without scenario is where most of the judgement — and most of the challenge — lies. The valuer must assess:
Would the seller actually compete if unconstrained? A 70-year-old seller exiting to retire is unlikely to establish a competing business regardless of the NCA. A 40-year-old serial entrepreneur with deep industry relationships almost certainly would. The probability of competition directly scales the value of the agreement.
If the seller does compete, how much damage would they inflict? This depends on:
The value of a non-competition agreement is driven primarily by two factors: the probability that the seller would actually compete, and the commercial damage they could inflict if they did. Both require careful, evidence-based estimation rather than generic assumptions.
The impact of potential competition typically diminishes over time. In the first year after the acquisition, the seller's relationships and market knowledge are fresh. By year three or four, the acquirer has had time to solidify customer relationships, integrate operations, and build independent market position. Most NCA valuations model a declining impact over the agreement's term.
The value of an NCA depends critically on its enforceability. A non-competition agreement that a court would not uphold has limited economic value, regardless of its contractual terms.
| Jurisdiction | Enforceability | Key Considerations |
|---|---|---|
| England & Wales | Generally enforceable if reasonable | Must protect legitimate business interest; reasonable in scope and duration |
| United States | Varies by state | California bans most NCAs; other states enforce with limitations |
| EU Member States | Varies widely | Germany requires compensation during restriction period |
| Australia | Enforceable if reasonable | Courts will sever unreasonable provisions rather than void entirely |
A non-competition agreement that is overly broad in geographic scope, unreasonable in duration, or unsupported by adequate consideration may be unenforceable. Valuation must account for enforceability risk — an unenforceable NCA has zero value regardless of its contractual terms.
NCA values interact with the values attributed to other intangible assets, particularly customer relationships. If the customer relationship asset already assumes some customer attrition (which it should), the Without scenario for the NCA should not double-count that attrition. The NCA should capture only the incremental customer loss and revenue decline attributable specifically to the seller's competition.
The tax treatment of NCAs varies by jurisdiction but can be significant. In many jurisdictions, NCAs are amortised over their contractual term, providing a tax deduction that reduces the effective cost of the acquisition. The Tax Amortisation Benefit (TAB) should be incorporated into the valuation.
NCA values in most transactions range from 1-10% of total deal consideration. Values at the higher end of this range require strong supporting evidence — a highly capable seller with deep customer relationships in a concentrated market. Values below 1% may suggest the NCA is immaterial and does not require separate recognition.
Non-competition agreements are among the most judgement-intensive intangible assets to value. There is no market data, no royalty rate benchmark, and no directly observable transaction. The valuation rests entirely on the credibility of the assumptions underlying the Without scenario. Document these assumptions thoroughly — they will be scrutinised in audit.
NCAs have a defined contractual term, making their useful life straightforward: it equals the remaining term of the agreement from the acquisition date. Amortisation is typically straight-line over this period, though an accelerated pattern may be appropriate where the competitive threat is greatest in the early years and diminishes over time.
Non-competition agreements are one of seven marketing-related intangible assets under IFRS 3. For the full classification, see 35 types of intangible assets. To explore the With-and-Without method in greater detail, read our guide to intangible asset valuation methods.
Tony Hillier is an Advisor at Opagio with over 30 years of experience in structured finance, M&A advisory, and intangible asset valuation. Meet the team.
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