Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Commercial Damages – Lost Profits, Loss of Business Value, or Both

Damages in commercial litigation are generally determined based on a lost profits calculation or as a reduction in value of the business. Where the damage is temporary, it is usually more appropriate to determine the lost profits from the date the damage was caused to the date the business recovered from the actions of the party that caused the damage. Where the business has been immediately destroyed, the appropriate measure of damages is the value of the business prior to destruction. However, there may be elements of both measures of damages in cases where there has been both a temporary setback and a permanent reduction in value of the business.

Assume the actions of a third party (XYZ) causes a temporary reduction of profits of a business (ABCO), over some time period, from pre-damage levels to an amount insufficient to support the ABCO, forcing it to fail. The damages include the lost profits from the date of XYZ’s actions to the date ABCO failed. The damages also may include the value of the business but for the actions of XYZ at the date ABCO failed. Similarly, had ABCO not failed but its value was permanently impaired (i.e., there is a permanent reduction of profits), damages may include the loss in business value but for the actions of XYZ.

Lost profits and business valuations are complex topics and the above comments do not deal with the many issues that arise in these types of calculations. In all of these determinations it is necessary to satisfy the legal principles of reasonable certainty and proximate cause. Damage periods, other causes for potential lost profits, tax affects, discount rates, and many other issues must be considered. In addition, it is incumbent on the damaged party to attempt to mitigate any resulting damages. Use of a qualified professional is recommended.

Steve Koons, CPA, ABV, ASA, CFF