See for Deal Structure general discussion.
In BVX, non-compete payments are a purchase price allocation, and hence are part of the Enterprise Value, not in addition to it.
Amount A specific amount or 0 (zero) for non-compete allocation
Interest % interest rate on the Non-compete payments
Years # of years for non-compete payments, or
0 (zero) for a 5-year balloon payment, or
C if non-compete payments are part of cash at closing
Payments Fixed principal, variable interest
Other Non-compete is amortized over 15 years and the amortization is deducted from taxes, regardless of when non-compete payments are made.
Sell-side advisors often insist that non-compete payments are in addition to the purchase price. This is OK only if the buyer insists on a non-compete agreement knowing that the future profits of the business are not going to get compromised even if the seller competes after the sale. (Note: In this situation one should question the buyer's need for the non-compete agreement anyway). However, in real life business's future profits are usually at risk if the seller is likely to compete after the sale. In this situation if the purchase price is based on profit projections that assume no such risk, then the buyer should not pay an additional amount for the non-compete agreement. The buyer is entitled to receive, as part of the purchase price, all assets required to generate the expected profits, including the non-compete asset. Often the actual amount allocated to non-compete is influenced by tax-motivations rather than just for the non-compete purpose.
- Enter the $ amount allocated to Non-compete payments.
- Enter the % Interest on the Non-compete payments.
- Enter the repayment period in # of Years for the Non-compete amount. For example, if 5 is entered as the number of years, BVX will pay down the non-compete amount uniformly over 5 years. Do not enter fractional years.
- Enter 0 (zero) if the Non-compete payment is a five-year balloon payment (BVX does not allow a non-compete balloon payment less than 5 years).
- Enter C (for Cash) if the Non-compete amount is pre-paid as part of the up-front cash payment.
BVX pays accrued interest and amortizes the non-compete amount in uniform annual principal payments over the # of years specified beginning with the first year post-acquisition. (Example: Assume Non-compete = 1000, interest = 10% and Years = 5. Year - 1 debt service will be 300, consisting of 100 for interest and 200 for principal. At the end of Year - 1 outstanding debt will be 800. Year - 2 debt service will be 280, consisting of 80 for interest and 200 for principal.)
Note: BVX amortizes the non-compete amount over 15 years, regardless of how non-compete payments are made. Non-compete amortization reduces taxable income in both the Asset purchase and the Stock purchase.