Damages from lost profits and lost business value are sometimes considered synonymous, but are generally vastly different conceptually as well as computationally.
In this article, we’ll take a look at the differences between the two and the cases where they are used.
Lost profits are lost sales less costs directly associated with those lost sales resulting from alleged acts of defendants including but not limited to; breach of contract, defamation, fraud, product defect, theft of trade secrets.
Lost sales are usually calculated using historical trends (before and after method) or similar contemporaneous trends (yardstick approach).
The before and after method involves obtaining an adequate history of sales prior to plaintiff’s actions and then developing a trend through regression analysis or other methods that can be used to extrapolate future sales but-for plaintiffs act that is alleged to have caused the lost sales.
Similarly, the Yardstick approach involves obtaining an adequate history of sales correlated with another factor (the yard stick) for example, industry sales.This correlation is then used to determine what plaintiffs sales should have been but-for plaintiffs act that is alleged to have caused the lost sales.
Costs should be related to lost sales and not include costs unrelated to lost sales.
Lost Business Value—Concept and Computations
Lost business value is the loss in the value of a business resulting from alleged acts of defendants including but not limited to; breach of contract, defamation, fraud, product defect, theft of trade secrets.
The difference between the value of the business but-for the alleged act less the value of the business at the time of the alleged act is the lost business value.
The business should be valued using standard valuation methodologies but with data that would have been known or knowable at the time of the valuation.
Unlike lost profits, lost business valuation should not consider data subsequent to the alleged act but only data that would have been known and knowable prior to or at the time of the alleged act.
Which Approach Should Be Used in Litigation?
The approaches used in litigation depend on the circumstances of the case and the legal theory of damages. For example, does the case involve theft of trade secrets, breach of contract, fraud, product defect, false advertising, misrepresentation of financial information each of which may have a different legal theory of damages?
If the aggrieved company has a sufficient history of sales prior to the event that is stronger than the relationship between the company sales and the yardstick company sales then the before and after method may be more appropriate.
If the aggrieved company does not have a sufficient history of sales that can be extrapolated forward but a strong correlation between that company and the yardstick sales, then the yardstick approach may be more appropriate.
Similarities and Differences in Analysis
Lost business value is in essence lost profits or cash flows into perpetuity because the value of a business can be determined by the present value of its expected future profits or cash flows.
In this sense the two are very similar as one (lost profits) is nested in the other (lost business value) with some adjustments based on data used to derive as described above.
However, as described above when calculating the lost business value one must use data that is known and knowable only at the time of the loss or adverse action and not rely on hindsight. This is not the case when calculating lost profits where one can use a methodology that takes into account economic conditions for each lost profit period.
Can a Plaintiff Claim Lost Business Value and Lost Profits at the Same Time?
Yes, a plaintiff can claim lost business value and lost profits at the same time. Claiming both of them depends on the specifics of your case.
I once worked on a GPS product defect case where plaintiffs sued the manufacture of the product in the GPS that caused their product to fail. The GPS company claimed they lost profits trying to fix the product and due to lost sales while in the process of repairing and getting the repaired product back on the shelf to clients.
In addition, plaintiffs claimed the product defect hurt their reputation and thus harmed their expected future sales and hence the value of their GPS business also declined.
Thus, they claimed both lost profits and lost business value damages. However, one must be careful not to double count lost profits as part of lost business value since as described above, lost profits are nested or part of lost business value.
Choosing the Right Expert Witness to Calculate Lost Business Value and Lost Profits
Lost profits and lost business value are similar in many ways described above but only the right economic damages calculation expert can identify the critical computational and data measurement factors needed to accurately measure each of these economic damage calculations and provide you with a thorough analysis of the damages.
DMA Economics has been calculating both lost profits and lost business value for clients for over 30 years. We understand all the nuances involved in such calculations and are thus your best choice for deriving these types of damages from an economic damages expert.
To learn more about how we can help with calculating lost profits or lost business value contact us today using the form below.