When a business is harmed by a breach or a wrongful act, the damages can be measured as the profits it lost or as the reduction in what the business is worth. Which measure is legally available is counsel's question. Which one matches the facts is the expert's, and the answer usually turns on one thing: did the business survive?
Lost profits: the business went on
A lost-profits model compares the revenue the business would have earned but for the harm with what it actually earned, then subtracts the costs it avoided by not earning that revenue. Three choices drive the result. The damages period runs from the harm until the business recovered or reasonably could have. The margin must be incremental, not gross: only the costs that would actually have been incurred to earn the lost revenue are deducted. The projection needs a basis that predates the dispute, such as historical performance, signed contracts, or budgets prepared in the ordinary course. Future amounts are discounted to present value.
Lost value: the business did not
When the harm destroyed the business or permanently impaired it, the measure is the value of what was lost as of the date it was lost: the value before the harm less the value after, using income or market approaches. Because a valuation already captures all expected future profits, there are no additional lost profits after the valuation date.
The double count
The classic error is claiming lost profits through a date and then adding the lost value of the business as of that same date, when that value already includes the profits that follow it. The overlap can be large, and it is exactly what a contradiction chart is built to expose. An expert who claims both for the same period has handed the other side its cross-examination.
What the records have to show
- Financial statements and tax returns for several years before the harm, to establish the baseline.
- Contracts, backlog, and pipeline as of the date of harm.
- Budgets and projections prepared before the dispute. Projections prepared for the litigation carry less weight than ones prepared to run the business.
- Records of mitigation: what the business did to recover, and what it cost.