What Is Non-Compete Agreement? | Agency M&A Definition
A non-compete agreement is a contractual clause that prevents the selling agency owner from starting or joining a competing business for a specified period and within a defined geographic or industry scope after the sale closes. In agency M&A, non-competes protect the buyer’s investment by ensuring the former owner does not immediately siphon away clients, employees, or market position.
Non-Compete Agreement in Agency M&A
Non-compete agreements are nearly universal in marketing agency acquisitions. When a buyer pays a premium for an agency, they are paying for relationships, reputation, and expertise — all of which reside primarily in the founder’s head. Without a non-compete, nothing stops the founder from launching a new agency the day after closing and calling every client to say, “I’m available again.” This would devastate the value of the acquired business.
Typical non-competes in agency deals restrict the seller from operating, owning, or being employed by a competing marketing agency for two to five years within a relevant geographic area or industry vertical. Broader agencies may see geographic restrictions (e.g., the United States or North America), while niche agencies often use industry-based restrictions (e.g., healthcare marketing or B2B SaaS marketing). Courts in different states enforce non-competes with varying degrees of strictness — California famously refuses to enforce most non-competes, which complicates deals involving California-based agencies. Sellers should negotiate the narrowest reasonable scope: if you ran a paid media agency, being restricted from all marketing consulting for five years may be unnecessarily broad. The non-compete should match the specific services and client base of the acquired agency.
How Non-Compete Agreement Affects Agency Valuation
Non-compete agreements directly affect deal economics in two ways. First, a portion of the purchase price is often allocated to the non-compete in the purchase agreement, which has tax implications — payments for non-competes are treated as ordinary income to the seller rather than capital gains, increasing the tax burden. Buyers prefer allocating more to the non-compete for faster amortization deductions, while sellers want to minimize this allocation. Second, the strength and enforceability of the non-compete influences the buyer’s confidence in retaining clients post-acquisition, which in turn affects the multiple they are willing to pay. An unenforceable non-compete — due to overly broad terms or unfavorable state law — can reduce the offered multiple by 0.5-1x as the buyer prices in higher client attrition risk.
Example
A founder sells her $1.6M-revenue influencer marketing agency for $2.1M. The purchase agreement allocates $210K of the price to a three-year non-compete covering influencer marketing and social media management services in the United States. This $210K is taxed as ordinary income at the founder’s marginal rate of 37%, costing her $77,700 in federal tax. Had the same $210K been allocated to goodwill instead, it would have been taxed at the long-term capital gains rate of 20%, costing $42,000 — a $35,700 difference. The founder’s attorney negotiates the non-compete allocation down to $130K, saving her approximately $22,100 in taxes.
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