Non-compete agreements are among the most contentious intangible assets in a purchase price allocation. They are explicitly recognised under IFRS 3 and ASC 805 as contractual-legal intangible assets — meaning they meet the recognition criteria through their contractual nature. But their value is often modest relative to other intangibles, and the analysis required to value them is disproportionately complex.
The reason non-competes matter, despite their typically small value, is that they represent the protective envelope around other, more valuable intangible assets. Without a non-compete, the seller could immediately compete with the acquired business, potentially eroding the value of the customer relationships, technology, and trade name the acquirer just paid for. The non-compete's value is the economic benefit of that protection.
The With-and-Without method is the only appropriate approach for valuing non-compete agreements. Unlike RFR or MPEEM, it directly models the economic consequence of the asset's absence — which is precisely what a non-compete protects against.
The With-and-Without (W&W) method values an intangible asset by comparing two scenarios: the expected economic performance of the business with the non-compete in place versus the expected performance without it. The difference between the two scenarios, discounted to present value, is the fair value of the non-compete.
The "without" scenario is the analytical core of the valuation. It requires the valuer to estimate the realistic economic impact of the seller competing against the acquired business.
Consider the seller's industry relationships, technical expertise, reputation, and financial resources. A founder with deep customer relationships poses a greater competitive threat than a financial sponsor.
What percentage of the existing customer base would follow the seller to a competing venture? This depends on the strength of personal relationships, switching costs, and contract terms.
Reduce revenue for customer losses and model margin compression from competitive pricing pressure. The impact should be phased — maximum impact in years 1-2, diminishing as the acquired business establishes its independent position.
Additional marketing, customer retention incentives, and potential hiring costs to replace the departing seller's capabilities should be modelled as incremental expenses.
Not all sellers would actually compete if the non-compete did not exist. The "without" scenario should be probability-weighted to reflect the likelihood that the seller would in fact establish a competing business:
| Factor | Impact on Probability |
|---|---|
| Seller's age and career stage | Older sellers less likely to start competing ventures |
| Financial outcome of the sale | Well-compensated sellers have less incentive to compete |
| Seller's specialisation | Highly specialised sellers have fewer alternative options |
| Market barriers to entry | High barriers reduce the probability of competition |
| Seller's stated intentions | Expressed desire to retire reduces probability |
Suppose the "without" scenario shows £5M of present value cash flow loss over the non-compete period. If the probability that the seller would actually compete is assessed at 40%, the fair value of the non-compete is £5M x 40% = £2M. This probability weighting is critical — without it, non-compete values are systematically overstated.
A non-compete agreement is only valuable if it is enforceable. Enforceability varies significantly by jurisdiction:
| Jurisdiction | Enforceability | Key Considerations |
|---|---|---|
| England & Wales | Generally enforceable if reasonable | Must be reasonable in scope, duration, and geography |
| California (US) | Generally unenforceable | Non-competes are void under California Business & Professions Code §16600 |
| New York (US) | Enforceable with limitations | Must protect legitimate business interests |
| Germany | Enforceable with compensation | Employer must pay 50%+ of salary during restriction period |
| EU (FTC proposal pending) | Jurisdiction-dependent | Trend toward restricting enforceability |
If a non-compete is unenforceable in the relevant jurisdiction, it has zero fair value. The valuer must obtain a legal opinion on enforceability before performing the financial analysis. An unenforceable non-compete fails the contractual-legal criterion and cannot be recognised as a separate intangible asset.
The useful life of a non-compete agreement is straightforward — it equals the contractual term of the restriction. A 3-year non-compete has a 3-year useful life; a 5-year non-compete has a 5-year useful life. There is no concept of "renewal" since non-competes do not renew.
Amortisation is typically straight-line over the contractual period, though an accelerated pattern may be more appropriate if the competitive threat is highest in the early years and diminishes as the acquired business establishes independent customer relationships.
The non-compete valuation must be coordinated with the valuation of other intangible assets to avoid double-counting. Specifically:
Customer relationships. The customer relationship valuation typically assumes a certain attrition rate. If the non-compete is in place, that attrition rate is lower. The customer relationship should be valued assuming the non-compete exists (the "with" scenario), and the non-compete captures the incremental value of the protection.
Goodwill. If the non-compete value is understated, the difference flows into goodwill. Since goodwill is not amortised but non-competes are, getting the allocation right affects future income statements through amortisation expense.
Trade name. Brand protection provided by the non-compete is already captured in the non-compete analysis if the "without" scenario models brand confusion or dilution from a competing venture.
Non-compete valuations are small in absolute terms but disproportionately important for PPA accuracy. The With-and-Without method provides the only conceptually sound framework for measuring their value. Focus the analysis on the realistic probability and economic impact of actual competition, not a worst-case scenario. The Opagio Calculator supports W&W scenario modelling with probability-weighted outcomes for non-compete and other protective intangible assets.
Tony Hillier is an Advisor at Opagio with 30 years of experience in structured finance, M&A advisory, and asset valuation. He has valued non-compete agreements across technology, professional services, and managed services acquisitions. Meet the team.
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