- 37 -
covenant not to compete. Mr. Reilly then added the income tax
benefits of amortization over the covenant's estimated
enforceable period of 5 years to determine the portion of the
$2,050,000 sale price to be allocated to the covenant.
Mr. Reilly performed these calculations twice, once assuming
the most likely competition scenario from petitioner in the event
it reentered the Asian and Pacific market, and a second time
assuming the worst case competition scenario from petitioner.23
Mr. Reilly estimated the values of the covenant under the most
likely competition scenario and the worst case competition
scenario at $620,000 and $630,000, respectively. He then
reconciled these differences and arrived at a final value of
$620,000.
We find two difficulties with Mr. Reilly's report and his
calculations. First, we are unsure whether Mr. Reilly's
calculations and valuation of the covenant not to compete
erroneously assumed that petitioner could reenter these Asian and
Pacific markets again as "Mister Donut", despite the fact that
petitioner had conveyed its existing franchise agreements,
trademarks, and Mister Donut System to Duskin in the purchase
agreement. For instance, Mr. Reilly testified at trial that "The
23Under the worst case of competition from petitioner, Mr.
Reilly projected that petitioner's reentry into the Asian and
Pacific market would be so competitive that the purchaser of
petitioner's Mister Donut franchise business would be unable to
open new franchises after 1 year.
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