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Newsletter - Statistics on non-compete related intangibles and case study
This newsletter provides statistics on non-compete related intangible assets identified in purchase price allocation (“PPA”) studies. First, the value of non-compete agreements in relation to the total value of intangible assets is discussed. Second, the economic useful life of non-compete agreements is addressed. Finally, we present a case study on the use of ratios derived from PPA data for valuation purposes.
Non-compete related intangibles in PPA studies
Purchase price allocation studies that include non-compete related intangibles appear 1,063 times in the PPAnalyser database. This represents approximately 15% of the total amount of 7,280 PPAs recorded in the database. Non-compete is the fourth most identified intangible asset included in PPA studies, after customer relationships, trademarks and technology. The median value of non-compete agreements compared to the value of intangible assets is 1.6%. This percentage varies per industry. The graph illustrates the percentage per industry. The highest percentages are observed in the Mining and Retail industries and the lowest percentage is observed in the Finance, Insurance and Real Estate. It should be noted, that this outcome is to a large extent opposite to the outcome we arrived at when looking at customer relationship related intangibles.
Economic useful lives of non-compete related intangibles
The economic useful life of non-compete agreements is disclosed in 812 records of the PPAnalyser database. This represents 21% of the total amount of 3,872 economic useful life records. The economic useful life of non-compete agreements is most frequently disclosed after trademarks, customer relationships and technology related intangibles. The majority of the agreements have a finite economic useful life. The median economic useful life is 4 years. The median varies per industry as illustrated in the graph. The highest economic useful life for non-competes is observed in the Wholesale Trade industry and the lowest economic useful life is observed in the Mining industry.
Case study - the value of non-compete covenants in the context of a lawsuit
TrustCo A purchased TrustCo B and entered in a non-compete agreement with the selling shareholders and managers of TrustCo B to protect the position of TrustCo A after the transaction. After 1 year however, one of the shareholders of Trustco B starts a new venture, TrustCo C, and violates the non-compete agreement. Litigation follows. During the lawsuit, valuation experts assess the fair market value of the non-compete agreement through the use of various valuation methods. In an attempt to assess the value through external industry data, valuators looked at the purchase price allocations of comparable companies that included non-compete agreements. Through a benchmark, a value range between 1.5% and 2.0% of the intangible value was arrived at. This approach further supported the value arrived at through other valuation methods used.
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