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Trust and Doing Business Together

During a recent transaction there was a discussion about the amount to be allocated to the seller’s non-compete agreement. Because this amount is taxed as ordinary income to the seller (not capital gains) the seller’s team will want it to be as low as possible.

In this case, the buyer’s CPA suggested a high amount so that in the case the seller violated the agreement there was a benchmark amount the buyer could easily go after.

As the buyer discoursed on the benefits of this strategy I asked him if he expected the seller to violate the non-compete. He answered no and my response was that then it really didn’t matter and if he thought there would be a violation he shouldn’t buy the company.

This thinking applies to all aspects of any deal. If the buyer or seller (vendor or customer) think the other party is not trustworthy they should not enter into the business relationship.

“Everyone is a millionaire where promises are concerned.” Ovid (Roman poet)

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