New rules for covenants not-to-compete. (impact of the Revenue Reconciliation Act of 1993 on intangible assets)

Intangible assets acquired after August 10, 1993, including goodwill and covenants not-to-compete, are now defined as IRC [section]197 assets and are amortizable over 15 years (Revenue Reconciliation Act of 1993 - RRA). This is good news for buyers of businesses who would not have been able to amortize goodwill under the old rules. However, there are some significant changes affecting covenants not-to-compete that may not only be bad news for buyers and sellers of businesses, but may be unexpected.

Use of Covenants Not-To-Compete. Covenants not-to-compete have become common contracts used in business acquisitions when the buyer wants to be assured that key outgoing former owners or employees will not profit from the company's proprietary information to the detriment of the new owners. These contractual arrangements between the buyer of the business and the outgoing employee are usually for a one to five year period and cover clearly identified prohibitions. Often the covenants are written separately from the purchase as an agreement between the new owner and the seller.

The New Rules. The new [section]197 rules require that certain intangibles purchased after August 10, 1993 be amortized over 15 years on …