How do you value a non-compete agreement as an intangible asset?

Full Explanation

A non-compete agreement (or covenant not to compete) is a contractual intangible asset frequently encountered in business combinations where key individuals agree not to compete with the acquired business for a defined period. The standard valuation approach is the With-and-Without method. The 'with' scenario projects cash flows assuming the non-compete is enforced — the business retains its customers, margins, and market position as expected. The 'without' scenario models the impact of competition from the departing individual: potential customer losses, price pressure, reduced margins, and lost revenue. The fair value of the non-compete is the present value of the difference between the two scenarios, discounted at an appropriate risk-adjusted rate. Key assumptions include: the probability that the individual would actually compete (not guaranteed — some may retire), the market share they could capture, the duration and geographic scope of the agreement, and the enforceability under local law (UK courts may limit overly broad non-competes). Non-compete values are typically modest relative to other intangibles in a PPA because the probability-weighted impact is often limited. However, in cases where a founder-CEO with deep customer relationships agrees to a non-compete, the value can be significant. The non-compete is amortised over its contractual life, which is typically 2-5 years.

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