“A portion of the sale price is allocated to a non-compete….”
One of the facts of a sale of a business is taxes. The way taxation happens is taking the full sale price, say $100 as example, and dividing it to certain categories, the most common of these are goodwill, non-compete, inventory of any, finally, furniture, fixtures and equipment. The irs demands that both buyer and seller agree to the allocation, otherwise the irs gets cheated. And, what is good for the buyer May not be good for seller.
The buyer usually wants some share to go to non-compete so that if the seller does compete in the agreed market area, the buyer can tell the court and the court can look at the allocation and say the seller owes that sum allocated.
The market area can be a city block and it can be the world.
It usually says as owner, employee, consultant of the competitor for a period of 3-5 years. Each though is unique.
It is rare for this to become contentious in negotiation of a sale.
Does this help?
Remember I am not an attorney or CPA. I recommend the parties CPA’s be involved and look for balance for the parties in allocation as there are tax implications.
The entire approach for a sale is getting the deal done at the right price, at the right time, with reasonable approach to allocation and non-compete…
