ILNews

BGBC: Calculating lost profits requires analysis

February 1, 2012
Keywords
Back to TopCommentsE-mailPrintBookmark and Share

By Howard I Gross, Steven W. Reed and Casey L. Higgs

Computing the lost profits of a business as a result of a wrongful act is a complex task. And many times, the question to ask is: “But for” a wrongful act, what would the profits be? What would the value be?

Generally, lost profits are claimed as part of economic damages in litigation. A lost profits calculation, or economic damages analysis, is often performed to estimate the profits that were lost, or damages suffered, as a result of the wrongful act. In Robert L. Dunn’s 6th Edition of “Recovery of Damages for Lost Profits,” he writes that there are three requirements for damages recovery:

• The damages must be proximately caused by the wrongful conduct;

• The damages must be proven with reasonable certainty; and

• The damages must have been foreseeable at the time the contract was made (only for contract claims).

In calculating lost profits, net profits are recoverable. Net profits include the revenue the plaintiff would have earned “but for” the loss, reduced by the costs associated with generating the revenues. Gross profits are normally recoverable when net and gross profits are the same or if there is minimal or no additional costs necessary to realize the profits.

An important factor requiring identification is the damage period. Typically, the damage period begins on the date of the loss and ends when the company returns to the profitability or to the level of cash flow that it would have been at “but for” the loss.

There are several methods used to calculate profits that would have been attained “but for” the loss:

• Before-and-after method – This method projects operating results based off historical operating results as if there was no loss and then compares it to the actual results during the loss period to determine the damages.

• The Yardstick Approach – Under this method, the operating results from the loss period are compared to the operating results for the same period of a similar company for comparison purposes. The difference is used to determine the damages.

• Sales Project (But for) Method – Operating results are projected during the loss period absent the loss as if the loss did not occur. The projections are then compared to the actual results to determine the damages.

Which method is most appropriate depends on the circumstances of the issues at hand. Oftentimes, the calculation can use a combination of all three methods. The types and timeframe of financial data to be analyzed (e.g., actual, projections, etc.), the availability of competitor and industry information, among other factors, are all items that need to be considered when choosing the most appropriate method. Performing insufficient analysis of financial information, using an inappropriate growth rate to determine projections, and insufficiently considering other relevant factors can negatively impact the lost profits calculation.

Once a method of assessing damages is determined, the stream of lost profits needs to be discounted to their present values. Determining the appropriate discount rate is critical as a very small change in the discount rate can severely increase or decrease the amount of the lost profits calculated.

The process for calculating lost profits is based in sound and thorough analysis, but also requires the use of reasonable judgment and estimates. For these reasons, assessing damages can be a lengthy process. It is critical to be as accurate as possible when estimating cost revenues, calculating the costs associated with generating revenues and determining the appropriate discount rate. The calculated damages should be reasonable, based on reliable information using an appropriate methodology and performed by an experienced expert.•

__________

Howard I Gross, CPA/ABV/CFF, CFP; Steven W. Reed, CPA/ABV; and Casey L. Higgs, CPA/CFF, CFE, CVA are with BGBC Partners, LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit www.bgbc.com. The opinions expressed are those of the author.

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. Just an aside, but regardless of the outcome, I 'm proud of Judge William Hughes. He was the original magistrate on the Home place issue. He ruled for Home Place, and was primaried by Brainard for it. Their tool Poindexter failed to unseat Hughes, who won support for his honesty and courage throughout the county, and he was reelected Judge of Hamilton County's Superior Court. You can still stand for something and survive. Thanks, Judge Hughes!

  2. CCHP's real accomplishment is the 2015 law signed by Gov Pence that basically outlaws any annexation that is forced where a 65% majority of landowners in the affected area disagree. Regardless of whether HP wins or loses, the citizens of Indiana will not have another fiasco like this. The law Gov Pence signed is a direct result of this malgovernance.

  3. I gave tempparry guardship to a friend of my granddaughter in 2012. I went to prison. I had custody. My daughter went to prison to. We are out. My daughter gave me custody but can get her back. She was not order to give me custody . but now we want granddaughter back from friend. She's 14 now. What rights do we have

  4. This sure is not what most who value good governance consider the Rule of Law to entail: "In a letter dated March 2, which Brizzi forwarded to IBJ, the commission dismissed the grievance “on grounds that there is not reasonable cause to believe that you are guilty of misconduct.”" Yet two month later reasonable cause does exist? (Or is the commission forging ahead, the need for reasonable belief be damned? -- A seeming violation of the Rules of Profession Ethics on the part of the commission) Could the rule of law theory cause one to believe that an explanation is in order? Could it be that Hoosier attorneys live under Imperial Law (which is also a t-word that rhymes with infamy) in which the Platonic guardians can do no wrong and never owe the plebeian class any explanation for their powerful actions. (Might makes it right?) Could this be a case of politics directing the commission, as celebrated IU Mauer Professor (the late) Patrick Baude warned was happening 20 years ago in his controversial (whisteblowing) ethics lecture on a quite similar topic: http://www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=1498&context=ilj

  5. I have a case presently pending cert review before the SCOTUS that reveals just how Indiana regulates the bar. I have been denied licensure for life for holding the wrong views and questioning the grand inquisitors as to their duties as to state and federal constitutional due process. True story: https://www.scribd.com/doc/299040839/2016Petitionforcert-to-SCOTUS Shorter, Amici brief serving to frame issue as misuse of govt licensure: https://www.scribd.com/doc/312841269/Thomas-More-Society-Amicus-Brown-v-Ind-Bd-of-Law-Examiners

ADVERTISEMENT