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Why is a noncompete agreement an intangible asset?

A noncompete agreement is a type of clause that restricts one party from starting or competing in a business that is similar to another party. For example, if Maria sells Bob her Jet Ski business, Bob may force Maria to sign a noncompete agreement that would prevent Maria from starting a Jet Ski business for the next 10 years.

Noncompete agreements usually have an effective date, a reason for the agreement, specific dates that the agreement is effective, and specific compensation if either party violates the terms of the noncompete agreement.

A noncompete agreement is an intangible asset because there is value in preventing another party from operating a business within the same industry. While it is difficult to place a specific value on a noncompete agreement, value can be assigned during purchase accounting. Any noncompete agreement would be amortized over the economic life of the agreement.

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