With and Without (W&W) Method
Valuation Methods — Lesson 4 of 10
The With and Without method is conceptually the most intuitive of all intangible asset valuation techniques. Its premise is simple: the value of an asset equals the difference between the business's cash flows with the asset and the business's cash flows without it. The gap between those two scenarios — discounted to present value — is the asset's fair value.
Despite its intuitive appeal, the W&W method is among the most challenging to execute well. It requires constructing a credible counterfactual — a projection of what the business would look like if the asset did not exist. That counterfactual must be realistic, internally consistent, and defensible. The temptation to exaggerate the "without" scenario (and thereby inflate the asset's value) is ever-present.
This lesson explains when the W&W method is appropriate, how to construct robust scenarios, and provides a worked example for a non-compete agreement — the asset type most commonly valued using this approach.
The With and Without method values an intangible asset as the present value of the incremental cash flows the asset provides. Its strength is its ability to value assets whose impact is primarily defensive (preventing harm rather than generating revenue). Its weakness is the subjectivity inherent in constructing the "without" scenario.
When to Use W&W
The W&W method is the preferred approach for specific asset types where the other income methods are less suitable.
W&W Method Application Guide
| Asset Type | Why W&W Is Preferred | Alternative |
|---|---|---|
| Non-compete agreements | Value is defensive — preventing competition, not generating revenue | None — W&W is the standard method |
| In-process R&D | Value is the incremental benefit of completing development vs. starting over | DCF (if cash flows are isolable) |
| Favourable contracts | Value is the difference between contract terms and market terms | DCF (contract-specific) |
| Technology (when combined with other IP) | Isolating the incremental value of one technology component | RFR (if licensing data exists) |
| Regulatory approvals | Value is the cost and time avoided by having the approval | Cost approach (as cross-check) |
The W&W method should not be used when a more direct method is available. If an asset generates royalty savings (use RFR) or is the primary earnings driver (use MPEEM), those methods provide more reliable results because they require less counterfactual construction.
Constructing the Scenarios
The quality of a W&W valuation depends entirely on the quality of the two scenarios.
The "With" Scenario
This is typically the business plan — the projection of cash flows assuming the asset remains in place. In a PPA context, it is the post-acquisition business plan that the acquirer has prepared (or the pre-acquisition forecasts provided by the target's management).
The "with" scenario should be internally consistent, reflecting:
- Current revenue levels and realistic growth assumptions
- Operating margins consistent with historical performance
- Capital expenditure requirements to support projected growth
- Working capital needs aligned with revenue growth
The "Without" Scenario
This is the counterfactual, and it is where the method either succeeds or fails. The "without" scenario must answer: what would happen to the business if this specific asset ceased to exist on the valuation date?
Credible "Without" Scenarios
- Revenue decline of 10-25% over 2-3 years as customers shift to competitors
- Margin compression due to increased competitive pressure
- Higher marketing spend to compensate for lost advantage
- Gradual recovery as the business adapts
Incredible "Without" Scenarios
- Revenue drops to zero overnight
- Permanent 50%+ revenue decline with no recovery
- Business ceases to exist without the asset
- No management response to the loss of the asset
The "without" scenario must assume that management responds rationally. If a non-compete agreement expires and a former executive starts competing, the business would increase marketing spend, strengthen customer relationships, and potentially adjust pricing. The "without" scenario must reflect these mitigating actions — it is not a catastrophe scenario.
Probability Weighting
In many W&W applications, the outcome is not binary. A non-compete agreement, for example, does not guarantee that the subject will compete — it merely prevents them from doing so. If the non-compete expires, there is a probability (not a certainty) that the individual will compete.
Professional practice typically employs probability weighting across multiple scenarios.
Probability-Weighted Approach
| Scenario | Description | Probability | Cash Flow Impact |
|---|---|---|---|
| No competition | Subject does not compete even without the agreement | 30% | No difference between with/without |
| Moderate competition | Subject enters the market but captures limited share | 45% | 10-15% revenue decline over 3 years |
| Aggressive competition | Subject directly targets key customers | 25% | 20-30% revenue decline over 3 years |
The probability-weighted value is the sum of each scenario's present value multiplied by its probability. This approach produces a more nuanced and defensible result than a single-scenario analysis.
In the acquisition of a financial advisory firm, a key partner signs a 3-year non-compete agreement. Without the agreement, the acquirer estimates a 40% probability the partner would not compete (retirement, alternative career), a 40% probability of moderate competition (new firm, some client overlap), and a 20% probability of aggressive solicitation of the firm's clients. The probability-weighted analysis values the non-compete at $2.8 million — materially lower than the $4.5 million a single worst-case scenario would suggest.
Worked Example: Non-Compete Agreement
TechServ is acquired for $80 million. The CEO of TechServ signs a 4-year non-compete agreement. TechServ's current annual revenue is $40 million, with an after-tax operating margin of 15% (generating $6 million in annual after-tax cash flow).
"With" Scenario
Revenue grows at 5% per year. Margins remain stable at 15%.
"Without" Scenarios
Three scenarios are constructed based on the likelihood that the former CEO competes.
Cash Flow Projections by Scenario ($M)
| Year | "With" CF | No Competition CF | Moderate CF | Aggressive CF |
|---|---|---|---|---|
| 1 | 6.3 | 6.3 | 5.7 | 4.7 |
| 2 | 6.6 | 6.6 | 5.5 | 4.0 |
| 3 | 6.9 | 6.9 | 5.5 | 3.8 |
| 4 | 7.3 | 7.3 | 5.8 | 4.2 |
Incremental Cash Flows ("With" Minus "Without") ($M)
| Year | No Competition | Moderate | Aggressive |
|---|---|---|---|
| 1 | 0.0 | 0.6 | 1.6 |
| 2 | 0.0 | 1.1 | 2.6 |
| 3 | 0.0 | 1.4 | 3.1 |
| 4 | 0.0 | 1.5 | 3.1 |
| PV (at 14%) | 0.0 | 3.1 | 7.1 |
Probability-Weighted Value
| Scenario | PV of Incremental CF | Probability | Weighted Value |
|---|---|---|---|
| No competition | $0.0M | 35% | $0.0M |
| Moderate competition | $3.1M | 45% | $1.4M |
| Aggressive competition | $7.1M | 20% | $1.4M |
| Total | $2.8M |
Fair value of non-compete agreement: $2.8 million (before TAB).
Adding the Tax Amortisation Benefit at 25% tax rate over 4 years: approximately $3.1 million.
The Reasonableness Check
The non-compete value of $3.1 million represents 3.9% of the $80 million purchase price. This is within the typical range for non-compete agreements in services acquisitions (2-6% of deal value). If the analysis had produced a value of $15 million (19% of deal value), the assumptions would need re-examination — it would imply an unrealistic level of vulnerability to one individual's competitive threat. Always sanity-check W&W results against the overall deal context.
Common Pitfalls
Overstating the "without" scenario damage. The most frequent error. The counterfactual must assume rational management responses — not passivity in the face of competition. Businesses adapt. Customers have switching costs. Markets do not collapse overnight.
Ignoring the recovery curve. Even in the worst case, damage from competition is not permanent. Over time, the business adapts, replaces lost revenue, and restores margins. The "without" scenario should show a recovery trajectory, not a permanent decline.
Failing to probability-weight. A single worst-case scenario overstates value. Professional practice requires probability weighting across at least two, preferably three, scenarios to produce a defensible expected value.
Double-counting with other assets. If customer relationships are valued separately using MPEEM, the W&W "without" scenario for a non-compete should not assume the same customer losses. The non-compete protects the customer relationships — it does not replace their independent value.
What Comes Next
In Lesson 5: Discounted Cash Flow for Intangibles, we examine how to apply DCF analysis to intangible assets where cash flows can be directly isolated — and how the discount rate for an intangible asset differs from the discount rate for the business as a whole.
Tony Hillier is an advisor to Opagio with over 30 years of experience in structured finance, valuation, and due diligence across private equity and corporate transactions. Meet the team.