December 14th, 2006 | Noncompete Agreements

For those of you who have followed my writings and lectures, you are aware that valuation of noncompetes is one of my areas of interest and expertise. I continue to be confounded  by some of my colleagues who confuse the issue of whether Fair Market Value contemplates a willing seller who will sign a noncompete, as opposed to whether or not the noncompete has any value. They are two distinct but interrelated questions.

IF the hypothetical buyer expects the seller to sign a noncompete, then that noncompete must have value – otherwise, why would the buyer ask for it. If it has value, we should be able to value it. The value of that noncompete is part of the enterprise-level cashflows of the entity being sold.

In marital dissolution valuation, identifying the value of the assumed noncompete is important in many jurisdictions since that noncompete may not be a divisible asset. Similarly, personal goodwill may not be a divisible asset and I have identified a methodology for measuring that in conjunction with the noncompete. In states which have a "walk away" definition of fair market value – e.g., Florida after Held v Held – the value left to the buyer IF the seller was free to compete post-sale is what is divisible. Thus, a logical approach to determining that divisible value is to determine enterprise value THEN subtract the value of the noncompete/personal goodwill to arrive at a divisible value.

Fair market value may well contemplate a willing seller signing a noncompete, but that noncompete has value and it may be a substantial part of the value derived from enterprise-level cashflows.

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