Factors to consider The evaluation model should take into account the multipliers for each difference, with the likelihood that the seller or key staff will then be able to compete with the company. If the party concerned has no inducement, capacity or reason to present, the inability of competition may be worthless. My first deep experience in understanding competition contracts (many years ago) was in graduate school. At that time, the examples cited included only transactions between large publicly traded companies. As an expert in business valuation, I have found that non-competition bans on agreements involving tightly managed companies are “standard fair” – especially when the seller is not of retirement age. Projected after-tax cash flows with non-competition If the consideration paid to the seller for the conclusion of a non-compete agreement is included as part of the total purchase price paid for the acquisition, there are three good reasons to assign a separate value to the seller. Non-competition agreements help companies retain quality employees, protect inside information and prevent unfair competition. But while they are designed to protect businesses, they can also put them at great risk if they are not properly structured and maintained. In some cases, they receive an annual payment for a number of years. In other countries, the amount received by the seller is included in the total purchase price. In both cases, the seller makes a promise to the buyer that may have significant value for maintaining the future return potential of the acquired business. Therefore, a non-compete agreement is a significant (albeit intangible) asset for the purchaser, not to mention operational assets. Non-competition bonds provide buyers with a degree of comfort, as the expected flow of profits from the business to be acquired is not disrupted by competition from the former owner.
The seller benefits because the buyer is confident that the expected profits will occur and the seller will be able to maximize the purchase price. Based on the above factors, assess the likelihood that the former owner would compete with the purchased business if there were no restrictive agreements. The estimated probability factor is then applied to losses calculated in Stage 1, point c) to determine the “expected value” of losses. There are two generally accepted approaches that are used to determine the value of a non-compete agreement: the proposed amendments to the Income Tax Act mean that each amount collected by the seller for the granting of a restrictive federal amount is considered normal income for income tax purposes.3 The buyer will generally deal with the costs of how the seller treats the income; in this case, it would be a deductible commercial charge. There are a few exceptions to this general income integration rule. An exception is that the funder and the grante jointly choose, in a prescribed form, with their tax return for the year, that the amount is an eligible investment amount for the purchaser and an eligible capital amount for the donor. It is therefore necessary for the parties to determine the value of non-competition measures to ensure that there are no unintended tax consequences.