Recent FTC Rule Could Affect the Value of Noncompete Agreements

Noncompete agreements can be valuable to a business, especially after a merger or acquisition. Estimating the value of these agreements has become more complicated in light of a controversial new final rule issued by the Federal Trade Commission (FTC) that will ban noncompetes for most employees and independent contractors, starting in September 2024. Types of noncompetes Noncompete agreements have been a standard business practice for decades. Some are required as a condition of employment or upon termination of employment. Here, the employer requires an employee to sign a noncompete agreement to protect the employer’s business interests, guard against disclosure of trade secrets, and prevent the employee from poaching customers or clients. These agreements generally limit employment activities in the same field for a specified period. Noncompetes also may...

Valuing Non-Compete Agreements in Business Combinations

Purchase price allocations are an important part of negotiating a successful M&A transaction. The value of most assets — such as receivables, inventory and equipment — may be fairly straightforward. But the value of non-compete agreements is often a sticking point. To complicate matters, the buyer and seller may have conflicting tax objectives. This is because the buyer must amortize the amount allocated to non-competes over 15 years, whereas the seller must recognize the allocation as ordinary income. When the buyer and seller allocate different amounts to a non-compete agreement on their respective tax forms, they may trigger unwanted attention from the IRS. An objective business valuation professional can help the parties come to an agreement on the allocation amount before the deal closes. Factors to consider Under a...