Lost Profits Presentation

© 2016 Tressler LLP
Lost Profits Analysis for Lawyers
February 24, 2016
Presented by:
Todd M. Rowe, Partner
Tressler LLP
Lost Profits Analysis
for Lawyers
Todd J. Roeder, CPA
HSNO
Tressler LLP Insurance Group Meeting
1

The Basics of Lost Profits
Calculations
» Legal Perspective
» Accounting Perspective
» Hypotheticals
2

The Legal Perspective
» Expert Witness Standards
› Establishing the Expertise of Your
Accountant
› Admissibility Under Daubert and
Rule 702
» Lay Witness Standards
› Business Owner Testimony
› Third-Party Testimony
 Handout: Washington v. Kellwood, 105 F. Supp. 3d 293 (April 21, 2015)
3

Tips For Using Experts
» Plaintiff’s Expert
› Question whether you have tied the losses to the litigated
event.
› Question whether other non-litigated factors may have
contributed to the loss.
» Defense Expert
› Question whether opposing expert has tied the losses to
the litigated event.
› Explore all factors that may effect the loss calculation.
4

Legal Elements of a Lost Profits
Claim
To maintain a claim for lost profits, a plaintiff should generally
prove FOUR elements:
1. The defendant breached a legal duty to the plaintiff.
2. The defendant’s actions or failures to act damaged the
plaintiff.
3. The plaintiff's damages are “proximately related”
(causation or causal relationship) to the defendant’s actions
or failures to act.
4. Actual damages sustained to a “reasonable degree of
certainty.”
5

Elements: Causal Relationship
» The plaintiff's damages are “proximately related” (causation or
causal relationship) to the defendant’s actions or failures to act.
› “The damages…must be reasonably certain and directly traceable to the
breach, not remote or the result of other intervening causes.”
Coastal Aviation v. Commander, 937 F. Supp. At 1064
› Court excluded the expert’s lost profit testimony because it was not
sufficiently tied to defendant’s conduct, but assumed that the defendant
was liable for all claims and no other factors contributed to lost profits.
Pharmanetics, Inc. v. Aventis Pharmaceuticals, Inc., 182 Fed. Appx. 267, 272-73
(4th Cir. 2000)
6

Elements: Reasonable Degree of
Certainty
» Actual damages sustained to a “reasonable degree of
certainty.”
› Little guidance on this standard beyond cannot be speculative.
Handout: Millex Prods. V. Alra Laboratories, 237 Ill. App. 3d 177 (2nd Dist. 1992)

Lost Profit Approaches
• But For Profit
• Incremental Revenues and Expenses

But For Profit
But For Profit*
Less: Actual Profit
Equal: Lost Profit
* Profit that would have been earned “but for”
the actions of the defendant

Incremental
Lost Revenue*
Less: Saved Costs
Plus: Extra Expenses
Equal: Lost Profit
* Revenue that would have been earned “but for” the actions of
the defendant

Comparison
Description But For Actual Incremental
Sales 1,600$ 1,000$ 600$
Cost of Goods Sold at 60% (960) (600) (360)
Gross Profit 640 400 240
Other Variable Costs at 10% (160) (100) (60)
Fixed Costs (200) (200)
Profit 280 100$
Less: Actual 100
Lost Profit 180$ 180$

Saved Costs
Raw materials Labor
Cost of goods sold Commissions
Bad debt Rent
Royalties Supplies

Saved Costs
• “Fixed” costs that vary at certain levels of
revenue – semi-variable
• All costs are variable in the long term and
with substantial changes in revenue (rent,
salaries, etc)

Saved Costs
» Do you incur depreciation during an
interruption?
› Building
› Furniture
› Equipment
14

Saved Costs
After water damages a hotel, the hotel
closes for two months to repair the
building. The hotel pays 100% of the
housekeeping staff during the two month
interruption. Will you reimburse the hotel
for the housekeeping payroll?
15

Duplications
Does our lost profits calculation duplicate the
property damage claim?
› Supplies
› Repairs
› Payroll
› Damaged inventory
16

Duplications
Seats Inc. continues to make tractor seats after a fire. You
paid Seats $100,000 for employees to clean up and repair
fire damage. Seats, Inc. does not lose any sales. However,
fire damaged equipment results in production labor
inefficiencies during the repairs.
› Normal labor of $1,000,000
› Actual labor of $1,300,000
How much do you pay for production labor inefficiencies?
17

Duplications
Can a windfall result when paying for lost
profit and also paying for finished goods
at selling price?
18

Duplications
» $25 Raw material
» $15 Labor
» $15 Variable overhead
» $10 Fixed overhead
» $5 Freight to the customer
» $30 Profit
» Equals $100 selling price
19

Mitigation
After a car drove through his laundry cleaning
business, the owner opened a temporary
location. The temporary location avoided a
one month shutdown. The shutdown would
have resulted in lost profits of $10,000. Will
you reimburse extra expenses of $15,000 or
the mitigated lost profits of $10,000?
20

Net Loss
Prior to a fire, a restaurant had a net
loss. After the fire, can the restaurant
lose net income?
21

Due Diligence
A restaurant is damaged by a fire. The
restaurant is not certain they will rebuild.
After three months of reviewing their
options, the owners decide to rebuild. The
restaurant eventually reopens 12 months
after the fire. How many months do you pay?
22

Lost Profit Methods
» Before and After
» Market Share
» Yardstick Company
» Projection, Forecast or Budget
23

Before and After Method
Analyze trends before the event to project
revenue and expenses after the event.
24

Before and After
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
SALES
Actual
Date of Loss

Before and After
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
SALES
Actual
But For
Date of Loss
Loss Period
Date of Loss
Base Period

Before and After
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
SALES
Actual
Year 1 Year 2 Year 3
Date of Loss

Before and After
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
SALES
Actual
But For
Date of Loss
Loss Period
$4,300,000
Sales Loss

Before and After
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
SALES
Actual
But For
Loss
Period
$1,000,000
Sales Loss
Base Period

Market Share Method
Compare the plaintiff's market share in a
specific industry before and after the event.

Market Share

Market Share
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
SALES
Actual
But For
Market
Loss
Period
Base Period

Yardstick Company Method
Compare the plaintiff's earnings against those
of a similar business.

Yardstick Company
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
SALES
Actual
But For
Yardstick
Company
Loss
Period
Base Period

Projection/Budget Method
Compare the company’s loss period
projections, forecasts, or budgets utilized in
the ordinary course of business to actual
operating results.

Projection/Budget
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
SALES
Actual
But For
Budget
Loss
Period
Base Period

Expert Tips
• Industry reports
• Economic conditions
• Competition
• Seasonality
• Consistency
• Compare to historical operating results
• Reasonableness (customers, capacity, labor)

Reasonableness
$9,150 $21,166 $15,302 $1,339 $0 $28,194
$4,344,788
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
1999 2000 2001 2002 2003 Undated Future
h
1999 - 2003 = $75,151

Reasonableness
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Actual
But For
Budget
Loss
Period
Base Period
Not Reasonable

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