Non-compete agreements have been a troublesome item to understand for many people. However they are relatively straightforward.
A great many people don’t truly understand the ramifications of a non-compete agreement, but if caught in a situation where the issue raises its head, they usually get the drift fairly quickly. It all boils down to the basic fact that a person selling a business agrees not to compete or participate with the buyer of that business in the same niche, area, industry or market for a certain period of time.
The long and short of it is this agreement is alternatively referred to as a covenant not to compete or a non-compete agreement. This document, provided it meets certain conditions, may be defined as an acquired intangible asset accruing to the buyer. Be aware that this means it will be subject to cost recovery requirements from the IRS.
These agreements are far more common than people think, and it is customary when a business buyer and business seller iron out the terms of their agreement that they include a non-compete agreement. It’s a smart thing to do if it may be amortized for cost recovery for federal tax purposes.
The business of buying an enterprise generally breaks down into asset classifications: hard and soft assets. The hard assets are things like the equipment on the premises, etc, and the soft assets are intellectual property, the goodwill of the business and the non-compete agreement (often also called a covenant). The difficult task for the buyer often becomes trying to evaluate the price of the non-compete agreement. This has to do with the IRS mandating that intangible assets have to be depreciated over 15 years – much longer than those tangible assets.
Figuring out precisely what the non-compete agreement is worth is a headache of monumental proportions if done alone without the expert guidance of a skilled business attorney. In general the attorney will assist the buyer in determining how much damage the seller may be able to inflict on the buyer’s new business without a non-compete agreement. If the term confusion comes to mind, it’s time to speak with an expert business attorney and get on with running the business.