Download Lost Profits Dilemma

Lost Profits: Is There an Easy Button?
For: TSCPA 2014 Expo
David Kirk, CPA/CFF
Alex Walther, CPA, CFE
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Lost Profits: Is There an Easy Button
Agenda
Agenda/Introductions - Your Program!
Lost Profits - Dilemma – Lost Profits Defined
“Fab Four” of Credible Lost Profits Analyses
Planning
Determining Appropriate Damages Period
Estimating Lost Revenues and Costs
Sufficient Reliable Data
One v. Two Model Approach
Other Relevant Lost Profit Topics
David Kirk, CPA/CFF
David is a senior manager in Baker Tilly’s Consulting Group where he provides a
variety of financial consulting and accounting services to attorneys, insurance
companies, governmental agencies, and public and private corporations.
Prior to joining Baker Tilly, David spent approximately 11 years with national and
regional accounting firms providing forensic accounting and litigation services as
well as accounting and auditing services. He specializes in providing financial
consulting analyses related to matters in dispute including shareholder disputes, lost
profits, mergers and acquisitions, forensic investigations, professional liability and
class action lawsuits.
David serves on the TSCPA Business Valuation, Forensic and Litigation Services
Committee and is also a member of the Annual Conference Coordinator Committee.
David is part of the TSCPA Leadership Committee, DCPAs Partners In Education
Committee and is a mentor for the AICPA CFF Mentor Program.
Alex Walther, CPA, CFE
A senior manager in the firm’s consulting group, Alex specializes in providing
forensic accounting and consulting services to litigators, businesses, not for
profit, and government entities. Specifically, Alex assists clients better
understand complex accounting issues that arise in complex commercial
litigation, shareholder disputes, insurance claims, economic damages, and
fraud / forensic investigations.
Prior to joining Baker Tilly, Alex spent one year with a top 30 accounting firm
performing audits, internal control reviews, and reviews of information
technology internal controls.
Alex has a M.S.A. in Accounting and B.B.A in Accounting from Texas Tech
University. He has spoken before professional and educational groups on
various aspects of financial analyses, litigation consulting, fraud investigations,
economic damages, and current trends in the use of data and analytics in
forensic accounting matters.
Lost Profits Dilemma
Plaintiff
Defendant
The Art v. The Science
Lost Profits Dilemma
18 months
$30 mil
$2 mil
?
6 years
Plaintiff
Defendant
The Art v. The Science
Fab Four
“Fab Four” of
Credible Lost Profits
Planning
Determining the appropriate damages period
Estimating the relevant lost revenues and costs
Obtaining sufficient reliable data to support the
financial expert’s analyses, assumptions, and
opinions.
Proper Planning
Lost Profits Defined
Lost profits are based upon the alleged harm suffered by the
Plaintiff or injured party.
In a business setting, lost profits are determined as the amount
necessary to place the injured party in a position that it would
have realized had the incident not occurred.
Only “Net Lost Profits” are allowable in economic damages –
(Net Lost Profits = Lost Revenues less Avoided/Incremental
Costs)
Conceptual Issues in Measures of
Economic Damages
Courts have stated the general rule
permitting alternate theories of
recovery:
“[I]f a business is completely destroyed,
(then) the proper total measure of
damages is the market value of the
business on the date of the loss. If
the business is not completely
destroyed, then it may recover lost
profits. A business may not recover
both lost profits and the market value
of the business.”¹
1.
Montage Group, Ltd. V. Athle-Tech Computer Systems, Inc., 889 So.2d 180, 191 (Fla. App.2004)
(internal citations omitted). From “The Comprehensive Guide to Lost Profit Damages,” 2013, Chapter 9
Conceptual Issues in Measures of
Economic Damages (cont.)
Montage Group, Ltd. V. Athle-Tech Computer Systems,
Inc., 889 So.2d 180, 191 (Fla. App.2004)
Conceptual Issues in Measures of
Economic Damages (cont.)
Stated another way:
Numerous jurisdictions hold to the view that when the loss of business is
alleged to be caused by the wrongful acts of another, damages are measured
by one of two alternative methods: (1) the going concern value; or (2) lost
future profits. [T]he courts allow a plaintiff to recover either the present value of
lost future earnings or the present market value of the lost business, but not
both. The ‘going concern value’ is the price a willing buyer would pay and a
willing seller would accept in a free marketplace for the business in question. It
measures damages by awarding the difference between the going concern
value and the price actually received by the plaintiff upon sale of the business.²
2. Protectors Insurance Service, Inc. v. U.S. Fidelity & Guaranty Co., 132 F.3d 612 (10th Cir. 1998) But see Cooper Distributing Co. v. Amana Refrigeration,
Inc. 180 F.3d542 (3rd Cir. 1999) From “The Comprehensive Guide to Lost Profit Damages”, 2009, Chapter 8.
Conceptual Issues in Measures of
Economic Damages (cont.)
Protectors Insurance Service, Inc. v. U.S. Fidelity &
Guaranty Co., 132 F.3d 612 (10th Cir. 1998)
Conceptual Issues in Measures of
Economic Damages (cont.)
Cooper Distributing Co. v. Amana Refrigeration, Inc. 180
F.3d542 (3rd Cir. 1999)
Conceptual Issues in Measures of
Economic Damages (cont.)
Scenario 1: Temporary Impairment¹
Scenario 2: Immediate Destruction of Business²
Scenario 3: Slow Death of a Business³
Scenario 4: Startup/Emerging Businesses
1. “Financial Valuation Applications and Models”, Second Edition, James R. Hitchner, Wiley Finance, pages 1032-1034.”
2. ibid
3. ibid
Scenario 1: Temporary
Impairment:
Exhibit 1 – Temporary Impairment¹
Expected Profits
Profits
$1,600,000
$1,200,000
Lost Profits
$800,000
$400,000
Actual Profits
$0
1
2
3
4
5
6
1. “Financial Valuation Applications and Models”, Second Edition, James R. Hitchner, Wiley Finance, pg. 1033
7
Scenario 2: Immediate Destruction of
Business
Exhibit 2– Immediate Destruction of Business²
$2,000,000
Expected Profits
Profits
$1,600,000
Lost
Business
Value
$1,200,000
$800,000
$400,000
Actual Profits
$0
1
2
3
4
5
6
7
8
2. “Financial Valuation Applications and Models”, Second Edition, James R. Hitchner, Wiley Finance, pgs. 1033 and 1034.
9
10
Scenario 3: Slow Death of
Business:
Exhibit 3– Slow Death of Business³
$2,000,000
Expected Profits
Profits
$1,600,000
Lost
Profits
$1,200,000
Lost
Business
Value
$800,000
$400,000
Actual Profits
$0
1
2
3
4
5
6
7
3. “Financial Valuation Applications and Models”, Second Edition, James R. Hitchner, Wiley Finance, pg. 1034.
8
9
10
Scenario 4: Startup/Emerging
Businesses:
Exhibit 4– Startup/Emerging Businesses
$2,000,000
Expected Profits
Profits
$1,600,000
$1,200,000
Incident
$800,000
Losses May Be
too Speculative
$400,000
Actual Profits
$0
1
2
3
4
5
6
7
8
9
10
Comparative Summary of Lost
Profits v. Loss of Value:
The following table summarizes the differences between lost profits and lost business damages:¹
Attribute
Lost Profits
Loss of Value
Income stream
Incremental income stream net of
avoided costs
Typically net after tax income
Income stream
Before income tax
Typically after tax income
Income stream
Typically limited life
Into perpetuity
Valuation methods
Present value of post trial lost
incremental income added to pretrial
lost incremental income including
appropriate pre-judgment interest
added to the date of trial
Discounted net income or net cash flow
model, supported by other valuation
methodologies as needed
Discount rate
Based on either risk assessment,
risk-free rate, or plaintiff’s use of
funds depending on circumstances
(see Chapter 10A)
Based on risk assessment
Prejudgment and post judgment interest
Considered
Considered
Use of hindsight
(the “Book of Wisdom”)
Typically considered
Seek guidance
1. ”The Comprehensive Guide to Lost Profits Damages”, 2011, pg. 462, Business Valuation Resources.
Causation
Causation is the "causal relationship between conduct and result".
That is to say that causation provides a means of connecting
conduct with a resulting effect.
Legal Causation - A body of rights, obligations, and remedies that
is applied by courts in civil proceedings to provide relief for
persons who have suffered harm from the wrongful acts of
others.
Factual Causation - determines exactly what happened and
whether someone was responsible for the event or whether it
would have occurred anyway.
Causation (cont.)
Dunn on Damages
Published in the Winter 2011 – Dunn on Damages Issue 5
Addresses Causation Scenarios
for the Damages Expert
•Addresses:
•Relevancy
•Reliability
•Accepted Methodology
•Realm of Specialization
Three Common Elements –
- Legal Causation
The plaintiff must establish that the defendant was
under a legal duty to act in a particular fashion.
The plaintiff must demonstrate that the defendant
breached this duty by failing to conform his or her
behavior accordingly.
The plaintiff must prove that he suffered injury or
loss as a direct result of the defendant's breach.
Causation And Burden
of Proof
Credible lost profits include economic damages that
are natural, proximate, probable, or a direct
consequence of an act, excluding remote
consequences.
Courts generally rule that Plaintiffs must establish
lost profits to a reasonable degree of certainty.
Calculations cannot be speculative, vague or
contingent, unreasonable, or unforeseeable factor.
Keep in Mind
The approaches, methodologies, analytical
procedures, and analyses must relate to the
specific information of the issues in dispute.
The link between liability and causation is necessary
to establish economic damages.
Damages for net lost profits are recoverable only if
the plaintiff establishes legally sufficient proof that
the financial expert’s economic damages are
reasonable and that reliable factors were utilized.
Causation & Burden of
Proof – Relevant Case
Coyne’s & Co., Inc. v. Enesco, LLC, 2010 WL 3269977 (D. Minn.)
•Plaintiff’s CPA expert calculated lost profits damages through the
contract term, plus the profits it would have earned had the contract
been extended for an additional year.
•Defendants challenged under Rule 702 of the Federal Rules of
Evidence and the Daubert standard. Defendants claim the expert’s
opinions were “simply rudimentary math,” which failed to address
alternative explanations for the plaintiff’s losses and left an
“analytical gap” between the lost profits data and the expert’s
conclusions.
•The court found the plaintiff’s analysis was “not so fundamentally
unsound as to offer no assistance to the jury.”
Proper Planning
Elements Requiring Analyses
The financial expert analyses in calculating
credible net lost profit damages should
address (at a minimum):
•
•
•
•
Cause of loss
Factual basis for the claim
Legal pleadings
Deposition testimony
Proper Planning
Elements Requiring Analyses
(Cont.)
•
Determination of evidence supporting the financial
claims
•
Selection of one or two model approach to be
used to communicate results
•
Appropriate methodologies to estimate lost
revenues
•
Historical financial information and industry /
economic data to support the estimation of lost
revenues and incremental costs
Proper Planning
Elements Requiring Analyses
(Cont.)
•
Answers to interrogatories
•
Economic and industry outlook, and their effect
on the damages claim
•
Selection of most appropriate methodology(s)
•
Actual performance during the historical
damages periods, or anticipated performance in
the future damages periods
Proper Planning
Elements Requiring Analyses
(Cont.)
•
The length of the damages period
•
Discount rates, if applicable
•
Prejudgment interest relevant for the
jurisdiction/venue, if applicable
•
Independent research conducted by the
expert as necessary to support the economic
damages
Proper Planning Summary
Together, these elements comprise the framework within which
the financial expert can build credible lost profits damages
analyses
Credibility also depends on:
Assumptions
Support
Documentation
Conclusions
Damages for net lost profits are recoverable only if the plaintiff
establishes legally sufficient proof that the financial expert’s
economic damages are:
Reasonable
The expert used reliable factors without undue speculation
Damages Analyses
“Without” v. “With” alleged actions
OR
“But for”/Projected analyses v.
Actual/Projected analyses
OR
Lost profits analyses = (But for Revenues –
Costs)
– (Actual Revenues – Costs)
Determining the
Appropriate Damages
Period
•
Is it an Art v. Science
•
Typically begin on the date of the harmful act
•
End date is generally when the injured party is returned to
the position it would have originally occupied had the
alleged damaging action(s) not occurred
•
Duration of damages period left to processes of the trier of
fact informed by the presentation of conflicting evidence
•
Consider preparing multiple damage periods
Damages Period –
Relevant Case
Cole’s Tractor & Equipment, Inc. v. Homier
Distributing Co.
•
Plaintiff’s expert excluded under Daubert for
speculating on facts that were contrary to the evidence
•
Expert report was factually flawed, little to no
assistance to jury and did not “rise above the level of
speculation”
•
The expert took projections out 25 years, but did not
consider that the agreement states it “may be
terminated, by either party, for cause, giving at least 90
days written notice.”
Estimating the Lost
Revenues
•
•
Need to differentiate between legal/factual requirement of causation
and the proof of the amount of economic damages
Fact of damage is required to be proven with reasonable certainty
− Applies to the entire economic damages period, not just first or baseline
year
− Prove the acts of defendant caused damages
− Defendant’s act need not be the sole cause of plaintiff's lost profits they
must be a significant or material factor in the cause of loss
•
Expert may consider the effects economic, industry, companyspecific and other relating factors in their economic damages
calculation
Estimating “But-For”
Revenues - Four Methods
•
These methods provide the conceptual framework to gather empirical
and evidentiary support for revenue and cost projections of what
would have happened “but-for” the actions alleged against the
defendant
Before and after method (Historical)
Yardstick method (Industry & Guidelines)
Sales projections method
Market model
Estimating Revenues
Quantities:
•
•
•
•
•
•
Market share/behavior
(demand)
Geographic issues
Economic trends
Industry trends
Technology
Capacity
Projecting Revenues
Price:
•
•
•
•
Market share
Cost of production
Competition
Regulations
Projecting Revenues
(Cont.)
Documentation/Support/Assumptions
Justify your conclusions
Number of comparables (transactions,
companies, etc.)
Written documentation
Contracts or sales orders
Sufficient reliable data (historical)
Satisfy reasonable certainty
Before and After Method
Is a commonly accepted method to calculate lost
profits
Determines economic revenues before the
damages period by comparing the
performance of the business BEFORE the
event occurred and AFTER the effects of the
damaging events ends.
Before and After – But
For Projection
Damages Period
Actual Profits
Before
Profits
$1,600,000
$1,200,000
$800,000
Actual Profits After
$400,000
Actual Profits during
Damages Period
$0
1
2
3
4
5
6
7
Before and After Method
Relevant Case
Coastal Fuels of Puerto Rico, Inc.(“Coastal”) v. Caribbean
Petroleum Corp.(“Capeco”) 79 F.3d 182 (1st Cir. 1996)
•
•
The court looks at the plaintiff’s business before the
violation occurred, during the violation period, and
after the violations ended, and estimates the
amount by which the violation reduced the plaintiff’s
profits.
Defendant argued that Coastal should have used
the Yardstick Method. That would require an
appraisal of the reliability of a firm’s track record,
and consideration of the length of the track record,
which was only weeks long.
Before and After Method
Relevant Case
Springs Window Fashions Div., Inc.(“Springs”) v. The Blind
Maker, Inc.(“Blind Maker”), 184 S.W. 3d 840 (Tex. App. 2005)
•
•
The damage expert stated the Before and After Method
“is a very straightforward, simple methodology. What it
means is, you look at the operation of the business as
it occurred especially over a long period of time. And
then you look at an event. And then you look at the
business after the event before and after.”
Court considers award of lost profits as consequential
damages stemming from a fraud claim, and permitted
recovery based on a before and after analysis of
overall business profits.
Yardstick Method
•
Utilizes guideline company or industry measures to serve
as proxy:
− Lost revenues
− Costs
− Profits
•
Should demonstrate:
−
−
−
−
•
Similar product
Similar size
Similar location
Similar capabilities
Data should be of sufficient comparability and derived from
reputable and reliable sources
Yardstick Method Relevant Case
Gary’s Implement, Inc. v. Bridgeport Tractor Parts
•
•
•
•
Plaintiff sued for breach of contract, and after the first trial,
the Jury agreed
After the Defendant’s appeal and related litigation, a second
jury trial found in favor of the defendant and awarded
damages for the plaintiff’s breach.
Plaintiff appealed, and the court examined the expert’s
approaches to calculating defendant’s loss, including the
yardstick method.
The court stated that even though the expert relied upon
financial data that were “outside of time period specified by
the noncompetition agreement,” the expert’s testimony was
reliable enough to not be an “abuse of discretion.”
Sales Projection
Method
•
•
•
Utilizes company-specific forecasts for certain items,
preferably by using forecasts that the company has
prepared in the normal course of business or some
purpose other than litigation
Expert should try to conduct additional, independent
analyses of management projections and business plan to
determine that they are consistent with:
−
−
−
−
The industry
The guideline company
Or other benchmarks
Professional standards
What to Avoid
−
−
Pulling numbers from thin air
Presenting an unsupported wish list
Sales Projection Method Relevant Case
U.S. Salt, Inc. v. Broken Arrow, Inc., 2008 WL 2277602 (Minn.
2008)
•
Expert’s wholesale acceptance of management projections
without any verification of the estimates or any independent
market analysis were too speculative;
•
Although the law does not require mathematical certainty in
the proof and analyses of lost profits, it requires evidence
of profits grounded upon a reasonable factual basis.
Sales Projection Method Relevant Case
Telxon Corp. v. Smart Media of Delaware, Inc., 2005 WL 2292800
(Ohio App. 2005)
•
Case related to alleged agreements to develop a new retail
technology concept, and involved claims of breach of contract,
promissory estoppel, fraud, and misrepresentation.
•
Plaintiff’s expert opinions and report were based entirely on a
business plan that plaintiff developed some three years after the
breach and almost 15 months after filing the lawsuit.
•
Expert’s opinion was unreliable and speculative.
Market Model Method
• The Expert considers the plaintiff’s market share prior to the
defendant’s alleged act to determine lost revenues/sales
• Not used as often as the other three methods
• Used more often in Patent infringement cases
• Expert must define the appropriate market and analyze the
subject company’s historical sales as well as those of its
competitors
Market Model Method Relevant Case
See, e.g., Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768 (6th
Cir. 2002); and Crystal Semiconductor Corp. v. Tritech
Microelectronics International Inc., 246 F.3d 1336 (Fed. Cir.
2001)
•
Plaintiff sought lost profits for alleged patent
infringement based on its market share.
Other Methods for Calculating
Lost Revenues
Experts may also use other approaches such as:
•
Regression analysis
•
High-low method
•
The increment method
•
Terms of an underlying contract
•
Accounting of the defendant’s profits
Estimating Cost –
Methods and Drivers
•Know your subject company and how they track
costs
•Statistical Methods (e.g. regression analyses or
attribute sampling)
•Non statistical Methods(e.g. detailed account
analyses, direct assignments, accounting estimates,
cost accounting allocations, ratio analyses, etc.)
•Consider market and economic conditions
•Understand the fixed, variable, and semi variable
cost
Estimating Costs
Costs that should be deducted from lost revenues to
determine lost profits
•
Cost that would have been incurred in connection with the
generation of the claimed lost revenues/economic damages
•
Damages are equal to the revenue that would have been
derived, less additional costs that would have been incurred,
in performing the contract
•
Reasonable certainty requires proof of gross profits and
generally, evidence of overhead expenses or other costs of
producing income
Estimating Costs (cont.)
Starting point for the cost structure analyses
generally is the determination of fixed versus
variable costs
•
Fixed cost – will be expended regardless of
sales volume
•
Variable cost – will be spent only to generate
additional sales volume
Estimating Costs (cont.)
Glattly v. Air Starter Components, Inc., 2010 WL 3928480 (Tex. App.Hous. (1 Dist))
Damages Period
•
Can vary depending on the underlying cause(s)
of action and the underlying facts of the case.
•
Typically begins on date of the harmful act.
•
End date is generally when plaintiff returned to
the position it would have originally occupied
had the alleged damages actions not occurred.
•
Trial date may not provide the end point to the
loss.
•
Future damages periods need to be discounted.
Mitigation
•
Defendant has the burden of pleading or proving (a/k/a/ “doctrine
of avoidable consequences”)
•
Plaintiff should take reasonable steps to mitigate damages
caused by the defendant’s conduct
•
Does not require unreasonable or unprotected actions
•
The injured party will not be compensated for those damages that
the injured party could have avoided by reasonable efforts or
expenditures
Lost Profits – Relevant
Case
In re Magna Cum Latte Inc.
•
“[D]amages are equal to the revenue that would have
been derived, less additional costs that would have
been incurred, in performing the contract.”
•
Lacked reasonable certainty as to both the occurrence
and extent of the alleged renewal.
•
Court denied the business’s anticipated profits over a
10-year contract renewal term.
Sufficient Reliable Data
Keys to A Credible Loss Profit Analyses
•
Demonstrate the relevance, reliability, comparability, and
usefulness of the data relied upon
•
Evaluate sensitivity of assumptions
•
Data must be complete, neutral and free from errors
Professional Standards
The AICPA Code of Professional Conduct states
the following with regard to sufficient relevant data:
Obtain sufficient relevant data to afford a reasonable
basis for conclusions or recommendations in relation
to any professional services performed.
Professional Standards (cont.)
Statement of Financial Accounting Concepts No. 8 states the following
with regard to the relevance and usefulness of financial information:
[I]t must be relevant and faithfully represent what it purports to
represent. The usefulness of financial information is enhanced if it
is comparable, verifiable, timely and understandable.
Furthermore, the standards indicate that financial information should be
“complete, neutral, and free from error.”
Sufficient Reliable Data
(Cont.)
Reasonable Certainty
•
Oregon Supreme Court Justice – “I must confess…that I have no
more idea what reasonable certainty means than I have as to the
meaning of certain.” Hardwick v. Dravo Equip. Co., 569 P.2d 588
(Or.1977)
•
Does not require exact precision but should not be mere
speculation
•
Court adopted the rule that damages are recoverable for loss of
future profits only to the extent that the evidence affords a sufficient
basis for estimating such profits with reasonable certainty
•
Expert had sufficient supporting data to support the claim for lost
profits.
Sufficient Reliable Data –
Relevant Case
Blinds to Go, Inc. v Times Plaza Development, LP, 2011 N.Y. App. Div.
Lexis 7242
Sufficient Reliable Data –
Relevant Case
Glattly v. Air Starter Components, Inc., 2010 WL 3928480 (Tex.
App.-Hous. (1 Dist))
>
>
>
>
Newly formed Company misappropriated trade secrets of an
established company.
Established company granted lost profits
Appeal asserted failure to prove its damages for lost profits with
reasonable certainty
Supreme Court of Texas stated “Recovery for lost profits does not
require that the loss be susceptible of exact calculation.
However, the injured party must do more than show that they
suffered some lost profits…. Opinions or estimates of lost profits
must be based on objective facts, figures, or data…”
Sufficient Reliable Data –
Relevant Case
Gary’s Implement, Inc. v. Bridgeport Tractor Parts, 2011 WL 1198401
Sufficient Reliable Data –
Relevant Case
Illinois Tool Works, Inc. v. MOC Products Co., Inc., 2012 U.S. Dist. Lexis
116471 (August 17, 2012)
Sufficient Reliable
Data - Summary
> Garbage in = Garbage Out
> Testing and Verification
> Must be supportable to be reliable
–
–
–
Assumptions
Documentation
Opinions
One v. Two Model
Approach
The following sample lost profits analyses
are included only for informational and
educational purposes.
Scenario One and Two
Scenario One
Sample Lost Profits (One Model Method)
Damages Analyses With a Time Value of Money/Discount Rate
Historical Periods
Year
A
Lost Revenues
B
Incremental Cost
%
1
2
Future Periods
3
4
5
$610,000
$660,000
$710,000
$250,000
45%
45%
45%
45%
Total
$0 $2,230,000
45%
C-A*B
Incremental
Costs
$274,500
$297,000
$319,500
$112,500
$0 $1,003,500
D=A-C
Lost Profits
$335,500
$363,000
$390,500
$137,500
$0 $1,226,500
Discount Rate
15%
15%
15%
15%
15%
Discount Factor
1.00
1.00
1.00
0.87
0.76
$335,500
$363,000
$390,500
$119,625
E
F = 1 / (1+E) ^ # of periods
G=D*F
Present Value of
Lost Profits
$0 $1,208,625
Scenario Two
Appendix A Summary - Net Lost Profits
Year
"But For" Lost
Profits - Appendix B
1
Historical Periods
2
3
Future Periods
4
5
Total
$ 730,000
$ 925,000
$ 1,037,500
$ 1,150,000
$ 1,180,000
$ 5,022,500
394,500
562,000
647,000
1,012,500
1,180,000
3,796,000
Net Lost Profits
$ 335,500
$ 363,000
$ 390,500
$ 137,500
Discount Rate
15%
15%
15%
15%
15%
Discount Factor
1.00
1.00
1.00
0.87
0.76
Present Value of
Lost Profits
$ 335,500
$ 363,000
$ 390,500
$ 119,625
Actual/Projected
Lost Profits Appendix C
$
$
-
$ 1,226,500
-
$ 1,208,625
Appendix B
“But For” (a/k/a “Without
Interruptions”) Lost Profits
Projected
Year
"But For" Revenues:
Product A
Product B
Total Revenues
Expenses
Fixed
Semi-variable
Variable
Total Expenses
"But For" Lost Profits
1
Historical Periods
2
3
Future Periods
4
5
Total
$ 900,000 $ 1,100,000 $ 1,250,000 $ 1,400,000 $ 1,500,000 $ 6,150,000
700,000
900,000
1,000,000
1,100,000
1,100,000
4,800,000
1,600,000
2,000,000
2,250,000
2,500,000
2,600,000
10,950,000
150,000
240,000
480,000
870,000
175,000
300,000
600,000
1,075,000
200,000
337,500
675,000
1,212,500
225,000
375,000
750,000
1,350,000
250,000
390,000
780,000
1,420,000
1,000,000
1,642,500
3,285,000
5,927,500
$ 730,000 $ 925,000 $ 1,037,500 $ 1,150,000 $ 1,180,000 $ 5,022,500
Appendix C
Actual/Projected (a/k/a “With
Interruptions”) Lost Profits
Year
Actual/Projected Revenues:
Product A
Product B
Total Lost Revenues
Expenses
Fixed
Semi-variable
Variable
Total Expenses
Actual/Projected Lost Profits
1
Historical Periods
2
3
Future Periods
4
5
Total
$ 590,000 $
770,000 $
850,000 $ 1,275,000 $ 1,500,000 $ 4,985,000
400,000
570,000
690,000
975,000
1,100,000
3,735,000
990,000
1,340,000
1,540,000
2,250,000
2,600,000
8,720,000
150,000
148,500
297,000
595,500
$ 394,500 $
175,000
201,000
402,000
778,000
200,000
231,000
462,000
893,000
225,000
337,500
675,000
1,237,500
250,000
390,000
780,000
1,420,000
1,000,000
1,308,000
2,616,000
4,924,000
562,000 $
647,000 $ 1,012,500 $ 1,180,000 $ 3,796,000
Lost Profits – Tips/Tools
•
•
•
•
Expert’s estimation of lost profits should define the facts
and assumptions on which he/she is basing the analyses.
Should be credible and helpful to trier of fact by providing
information that is both relevant and reliable in the context
of the particular matter.
The approaches, methodologies, analytical procedures
and calculations must relate to the specific information of
the issues in dispute.
When financial experts have not tied their analyses to the
underlying cause of the damages, courts have often
excluded their testimony on the basis of either irrelevance
or unreliability or both.
Key Take Away
Make sure your
damages analyses are
reasonable, supportable,
and credible.
Remember the “Fab Four” of
Credible Lost Profits
Planning
Determining the proper damages period
Estimating the relevant lost revenues and costs
Obtaining sufficient reliable data to support the
financial expert’s analyses, assumptions, and
opinions.
Questions & Answers
Thank You!
David Kirk, CPA/CFF
214-658-6584
[email protected]
and
Alex Walther, CPA, CFE
713-802-0041
[email protected]