- 38 -
value of the [Duskin's] business would be reduced by $620,000,
due to the most likely competition from Mister Donut." But
petitioner had already transferred its rights to Mister Donut in
the operating and nonoperating countries. Assuming no covenant
existed, and petitioner had chosen to reenter the donut market in
these territories, it would have had to do so under a different
name.24
Second, Mr. Reilly computed the value of the covenant not to
compete under both the most likely and the worst cases of
competition without factoring in the likelihood of petitioner's
competition into his calculations. Although Mr. Reilly's report
stated that there existed a less-than-50-percent chance of
petitioner's reentering the Asian and Pacific market for such
franchise operations, his calculations ignored the fact that
competition was unlikely even without a covenant.
Based on our review of the record, we conclude that $300,000
of the sale price should be allocated to the covenant not to
compete. Respondent concedes that the amount allocable to the
24In response to respondent's pretrial inquiry, petitioner
stated that future competition from petitioner could reduce the
net income of a buyer of Mister Donut's Asian and Pacific
franchise operations by 40-45 percent. Petitioner attributed
this reduction to the following: (1) Formulas for the bakery
mixes, 10 percent; (2) ability to control suppliers, 30 percent;
and (3) knowledge of the business and donut market, 5 percent.
However, only the impact of the third factor, which petitioner
determined would reduce a buyer's net income by only 5 percent,
would presumably be attributable to the covenant not to compete,
as the supplier contracts and trade secrets were assets sold to
Duskin.
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