The third step is to determine the present value of the economic damages avoided during the duration of the non-competition agreement. What is “reasonable” varies from company to company, depending on the characteristics of the business, the statutes of the state and the jurisprudence, as well as the contractual terms. Employers must regularly update agreements and strictly enforce all violations in accordance with the specified conditions. Otherwise, their non-competition prohibitions will no longer be applicable. This step includes conducting a probability assessment to determine the likelihood that the former owner would compete without consent. This is probably the most difficult and subjective part of the analysis. Some of the factors that affect the likelihood of the former competitive owner are that non-compete bonds provide a certain level of comfort to buyers, 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. If the purchaser is a corporation, the generally accepted accounting principles (GAAP)1 must consolidate the financial statements of the parent company with those of its subsidiary.
Depending on jurisdiction, these accounting rules have specific standards2 under which a buyer must allocate the total purchase price paid in connection with a business combination to the fair value of all tangible and identifiable intangible assets recorded (including the non-compete prohibition agreement). This will allow stakeholders to obtain more information about the nature and cost of support. Predictable after-tax cash flows with a non-compete clause Sufficient sales revenue will also be a sensible measure. In addition, it is appropriate to consider whether the non-competition clause is legally applicable. In general, non-competition prohibitions can only be enforced if they are proportionate. As a lawyer, you already know that the courts have refused non-competition prohibitions covering a disproportionate area or a long period of time. One of the ways in which an valuation analyst might not compete with alliances and evaluate other restrictive agreements is through the use of a “with or without” method. This method compares the value of the business “to” the non-competitive agreement – without competition from the seller and “without” the agreed agreement – and therefore assumes that the seller is in competition with the company.