BUSINESS LOST PROFITS

Lost profits damages to a business typically occur when the company suffers reduced income, but continues to exist.  Such a situation, caused by a wrongful act gives rise to a calculation determining economic performance “but for” the act, less actual economic performance.   This differs from Lost Economic Value, a permanent reduction in business value, requiring business valuation techniques.  The key difference is the timeframe, or Damage Period, from the event to the resumption of normal operations.

 

The key to determining lost profits is the identification of the revenue stream “but for” the act, in terms of volume, price and growth.  Classic methods are applied to best determine this “Lost Revenue Stream”, including:

• Before & After Method
• Yardstick Method
• Sales Projection Method

Elements of Lost Profits include:

• Lost Revenue, less cost and expenses
• Before tax (generally)
• Present valued

THE EXPERT WITNESS

The findings of the Expert Witness are summarized in a written report and then communicated to the trier of fact.  The Expert Witness should portray the following critical characteristics:

• Knowledge
• Skill
• Education
• Training
• Experience

When choosing a Lost Profits Expert Witness, look for specialized training such as the Certified Forensic Financial Analyst, provided by the National Association of Certified Valuation Analysts.  The CFFA designation recognizes training, experience and successful examination in the finanical litigation path.  More details are at www.nacva.com.  Preferable, your Expert Witness will be certified in both Lost Profits analysis and Business Valuation.  See the separate article on Business Valuation.