July 18, 2022

Understanding Non-Competition Clauses in a Business Valuation

When you buy a business, it’s given that you don’t want the owner to set up shop near your location since that would just drive business away from you. With that considered, a non-competition clause in a contract sale prohibits the seller from doing that within a set geographic area and within a set period.

General Issues in Business Valuation

Issues from a business valuation, whether due to a dissolution of marriage or otherwise, can arise in the process. Several technical and financial factors are considered when valuing a business, including asset value, multiples of income, industry trends and data, and other financial and business variables and analyses.

For instance, a divorce might constitute a spouse seeking a lower value for the business while the other seeks a higher value. There is also the issue of whether non-business expenses go through the business, reduce the business’ net income, and arrive at a business value. In some instances, one spouse might sense that the other spouse is hiding income, which has been true in many cases.

The Link between Non-Competition Clauses and Personal Goodwill

Business matters can be attributed to marital matters. With that in mind, a seller that requires a non-compete clause constitutes the existence of personal goodwill, such as people supporting the business due to that person. However, this may not always be the case.

For instance, suppose there is an existing business, and a new business sets up shop next door with an unknown owner and zero personal goodwill to the other business. In that case, customers would simply enter that shop randomly, not due to the person in that business. Still, the existing business would have plenty of reason not to want a competitor to set up shop next door even if no personal goodwill existed.

Still, in Florida court, the first case stating that personal goodwill exists on some level if a non-competition clause was required is generally accepted. Often the assumption is that the value must all or almost all be personal. Most cases associated with this matter involve a professional practice where most of the value of the business relies on personal goodwill.

How Is Personal Goodwill Valued?

The extent to which a non-competition clause indicates personal goodwill, or in other words, how much personal goodwill is valued in dollars, is related to how much business or income of value would be gone if the seller leaves. It can also be how much a buyer will willingly pay for the non-competition clause.

In most valuation reports, the value of the non-compete clause is associated with the present value of the income for the buyer that would be gone if the key person leaves the business.

The Collaborative Divorce Approach

Business valuations are complicated, especially when it relates to a dissolution of marriage. This is perhaps the most compelling reason why Collaborative Divorce is a much better approach to family law cases than a litigated and adversarial one. Sometimes, a case is much easier resolved when both parties speak to one valuation expert and update the other at all times, instead of both parties seeking separate valuation experts, who might present different values. In the latter case, each spouse might only end up trusting the other less regarding seeking a fair result.

Dorsey Law JAX specializes in a wide range of family law issues. We provide all services under family law, from injunctions against domestic violence to divorce processes. We work to negotiate settlements but will fearlessly take a case to trial when necessary. If you are looking for a divorce attorney in Jacksonville, Florida, we are more than willing to help. Get in touch with us today and let’s talk!

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