The Court of Appeal in Orange County Ruled that Speculative Noncompetition Agreements Should Not be Considered in Business Valuation

In a divorce, the Orange County divorce court agreed with husband’s Orange County divorce lawyer and awarded the family business to husband and reduced the business’s value based on husband’s expert’s testimony that if husband had to sell the business, husband would likely have to sign a noncompetition agreement, which would preclude husband from working following a hypothetical sale of the business.  The divorce court determined that this hypothetical noncompetition agreement would likely last five years and cost husband $150,000.

The Court of Appeal reversed the divorce court’s holding because the hypothetical noncompetition agreement was based on speculation.  “A covenant not to compete is simply a means for protecting the value of the business goodwill. Until such a covenant has actually been negotiated, in light of the needs of the buyer and the seller, it is too speculative.”  Because there was no actual noncompetition agreement and no indication that husband would sell the business, the Court of Appeal ruled in favor of wife’s Orange County divorce lawyer and ruled that the divorce court erred by reducing the business.

In re Marriage of Czapar (1991) 232 Cal. App. 3d 1308