Nuts & Bolts of Lost Profit Cases (Series: Complex Financial Litigation 2020) Financial Poise
Business does not always go as planned. When a vendor breaches their contract to supply key parts, a lender reneges on their loan commitment, or a fire decimates a central distribution facility, the impacted business may have grounds to seek compensation in the form of the profits it would have earned had everything just gone smoothly. In order to successfully win (or defend against) any such claim, one must compile and analyze certain types of documents and information, understand and apply appropriate methodologies, and present their case in a manner consistent with that which the court or trier of fact requires. In this webinar, the expert panel discusses the circumstances that warrant lost profits claims, key considerations for both the claimant and defendant, and how such claims will ultimately be evaluated.
To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/lost-profit-cases-2020/
How to Measure Financial Efficiency: Five Tips for Assessing Your Small Busin...Colleen Beck-Domanico
What does it mean to be financially efficient? Companies with a high degree of financial efficiency require fewer assets, reducing use of cash, and limiting borrowing needs. Being financially efficient also means releasing cash quickly from inventory and through collections of accounts receivable, creating repayment sources that enhance creditworthiness. View this presentation to get five measure of financial efficiency, plus tips on assessing your small business customer.
Before going to market to sell your business, you or your executive team may want to obtain an independent appraisal. Likewise, prospective buyers may wish to obtain expert services to value an acquisition target or discrete portions of a target. This webinar provides a look into how valuation experts place a value on a going concern.
Part of the webinar series: Valuation 2021
Nuts & Bolts of Lost Profit Cases (Series: Complex Financial Litigation)Financial Poise
Business does not always go as planned. When a vendor breaches their contract to supply key parts, a lender reneges on their loan commitment, or a fire decimates a central distribution facility, the impacted business may have grounds to seek compensation in the form of the profits it would have earned had everything just gone smoothly. In order to successfully win (or defend against) any such claim, one must compile and analyze certain types of documents and information, understand and apply appropriate methodologies, and present their case in a manner consistent with that which the court or trier of fact requires. In this webinar, the expert panel discusses the circumstances that warrant lost profits claims, key considerations for both the claimant and defendant, and how such claims will ultimately be evaluated.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/nuts-bolts-of-lost-profit-cases-2021/
Business does not always go as planned. When a vendor breaches their contract to supply key parts, a lender reneges on their loan commitment, or a fire decimates a central distribution facility, the impacted business may have grounds to seek compensation in the form of the profits it would have earned had everything just gone smoothly. In order to successfully win (or defend against) any such claim, one must compile and analyze certain types of documents and information, understand and apply appropriate methodologies, and present their case in a manner consistent with that which the court or trier of fact requires. In this webinar, the expert panel discusses the circumstances that warrant lost profits claims, key considerations for both the claimant and defendant, and how such claims will ultimately be evaluated.
Part of the webinar series: COMPLEX FINANCIAL LITIGATION 2022
See more at https://www.financialpoise.com/webinars/
Nuts & Bolts of Lost Profit Cases (Series: Complex Financial Litigation 2020) Financial Poise
Business does not always go as planned. When a vendor breaches their contract to supply key parts, a lender reneges on their loan commitment, or a fire decimates a central distribution facility, the impacted business may have grounds to seek compensation in the form of the profits it would have earned had everything just gone smoothly. In order to successfully win (or defend against) any such claim, one must compile and analyze certain types of documents and information, understand and apply appropriate methodologies, and present their case in a manner consistent with that which the court or trier of fact requires. In this webinar, the expert panel discusses the circumstances that warrant lost profits claims, key considerations for both the claimant and defendant, and how such claims will ultimately be evaluated.
To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/lost-profit-cases-2020/
How to Measure Financial Efficiency: Five Tips for Assessing Your Small Busin...Colleen Beck-Domanico
What does it mean to be financially efficient? Companies with a high degree of financial efficiency require fewer assets, reducing use of cash, and limiting borrowing needs. Being financially efficient also means releasing cash quickly from inventory and through collections of accounts receivable, creating repayment sources that enhance creditworthiness. View this presentation to get five measure of financial efficiency, plus tips on assessing your small business customer.
Before going to market to sell your business, you or your executive team may want to obtain an independent appraisal. Likewise, prospective buyers may wish to obtain expert services to value an acquisition target or discrete portions of a target. This webinar provides a look into how valuation experts place a value on a going concern.
Part of the webinar series: Valuation 2021
Nuts & Bolts of Lost Profit Cases (Series: Complex Financial Litigation)Financial Poise
Business does not always go as planned. When a vendor breaches their contract to supply key parts, a lender reneges on their loan commitment, or a fire decimates a central distribution facility, the impacted business may have grounds to seek compensation in the form of the profits it would have earned had everything just gone smoothly. In order to successfully win (or defend against) any such claim, one must compile and analyze certain types of documents and information, understand and apply appropriate methodologies, and present their case in a manner consistent with that which the court or trier of fact requires. In this webinar, the expert panel discusses the circumstances that warrant lost profits claims, key considerations for both the claimant and defendant, and how such claims will ultimately be evaluated.
To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/nuts-bolts-of-lost-profit-cases-2021/
Business does not always go as planned. When a vendor breaches their contract to supply key parts, a lender reneges on their loan commitment, or a fire decimates a central distribution facility, the impacted business may have grounds to seek compensation in the form of the profits it would have earned had everything just gone smoothly. In order to successfully win (or defend against) any such claim, one must compile and analyze certain types of documents and information, understand and apply appropriate methodologies, and present their case in a manner consistent with that which the court or trier of fact requires. In this webinar, the expert panel discusses the circumstances that warrant lost profits claims, key considerations for both the claimant and defendant, and how such claims will ultimately be evaluated.
Part of the webinar series: COMPLEX FINANCIAL LITIGATION 2022
See more at https://www.financialpoise.com/webinars/
A case study presentation on Stirling Homex Corporation concerning financial reporting issues on revenue recognition policy, profit allocation and capitalization of expenses.
CASE 9.2 Business Case 329 C A S E 9 . 2Busin.docxwendolynhalbert
CASE 9.2 Business Case 329
C A S E 9 . 2
Business Case: HSBC Combats Fraud in Split-second Decisions
With billions of dollars, corporate reputations, customer
loyalty, and criminal penalties for noncompliance at stake,
fi nancial fi rms must outsmart fraudsters. Detecting and pre-
venting fraudulent transactions across many lines of business
(checking, savings, credit cards, loans, etc.) and online chan-
nels require comprehensive real time data analytics to assess
and score transactions. That is, each transaction has to be
analyzed within a split second to calculate the probability
that it is fraudulent or legitimate.
A big part of a bank’s relationship with customers is
giving them confi dence that they are protected against fraud,
and balancing that protection with their need to have access
to your services.
HSCB Overview
HSBC is a commercial bank known by many as the “world’s
local bank.” HSBC is a United Kingdom–based company
that provides a wide range of banking and related fi nancial
services. The bank reported a pre-tax profi t of $6.8 billion
in the fi rst quarter of 2014 (1Q 2014). It has 6,300 offi ces in
75 countries and over 54 million customers.
Fighting Fraudulent Transactions
HSBC was able to reduce the incidence of fraud across tens
of millions of debit and credit card accounts. The bank imple-
mented the latest Fraud Management software from SAS. The
software includes an application programming interface (API)
and a real time transaction scoring system based on advanced
data analytics. Using the Fraud Management app, HSBC has
reduced its losses from fraudulent transactions worldwide and
its exposure to increasingly aggressive threats. The antifraud
solution is live in the United States, Europe, and Asia, where it
protects 100 percent of credit card transactions in real time.
Scenario
Consider this scenario. A credit card transaction request
comes in for the purchase of $6,000 in home appliances. The
bank has a moment to decide to approve the transaction, or
reject it as potentially fraudulent. Two outcomes are possible:
• Legitimate purchase rejected: When a legitimate pur-
chase is rejected, the customer might pay with another
card. The bank loses the fee income from the purchase
and the interest fee. Risk of account churn increases.
• Fraudulent purchase accepted: When a fraudulent pur-
chase is accepted, a legitimate customer becomes a victim
of a crime. The bank incurs the $6,000 loss, the cost of the
fraud investigation, potential regulatory scrutiny, and bad
publicity. Chances of recovering any losses are almost zero.
With trillions of dollars in assets, HSBC Holdings plc is a prime
target for fraud. Fighting all forms of fraud—unauthorized
use of cards for payment and online transactions, and even
customer fraud—has risen to the top of the corporate
agenda. Fraud losses are operating costs that damage
the bottom line.
As required by regulations, HSBC has ...
RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2022: Bad Debtor Owes Me Money!Financial Poise
Sometimes it begins when a client, tenant, or customer starts to slow-pay, with the result that your accounts receivable start to accrue gradually. Other times the issue presents itself more suddenly. Either way, you find your company owed a great deal of money that looks like it may not be collected because your client/tenant/customer has filed bankruptcy, has commenced an assignment for the benefit of creditors, has been put into receivership, or is otherwise just plain insolvent. What do you do? What should you not do? The topics discussed in this webinar include the pros and cons of putting a counterparty into involuntary bankruptcy; when and how you may be able to pursue third parties (like guarantors, directors, or officers) for the amount owed; risks related to preference attack; pros and cons of sitting on a “creditors’ committee” in a Chapter 11; how to negotiate for “critical vendor” protection in Chapter 11; and practical guidance for continuing to provide goods or services to an insolvent counterparty.
Part of the webinar series: RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2022
See more at https://www.financialpoise.com/webinars/
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1. Lost Profits vs. Business
Valuation
Georgia Society of CPAs
Fraud & Forensic Accounting
Conference
September 18, 2009
1
2. Resources/Skills
Important to stay current
Expert witnesses need to know
acceptable methodology
Great use of CPA and forensic
accounting skills (skills not
possessed by pure finance people)
2
3. Two damage claim possibilities, one
exception
1. If the business is completely
destroyed, the damage equals the
market value of business on the
date of the loss event.
2. If the business is not completely
destroyed, the damage equals the
lost profits due to the loss event.
3
4. Two damage claim possibilities, one
exception
Exception:
This may occur if the business isn’t initially
completely destroyed and continues to
operate for a period of time before
closing.
In this case, the damage may be equal to
lost profits for a certain period of time
followed by the value of the business
from the date of the shutdown forward.
NO DOUBLE DIPPING
4
5. Case Example: Valuation as Sanity
Check on Lost Profits
Business struggled but wasn’t shut
down
Claimed lost profits were extremely
high
Business valuation highlighted the
overstated lost profits claim
5
6. Reasoning behind the
litigation exception
The rules of the game don’t change for
litigation
Estimates still must be developed using
sufficient competent evidence and
methods and techniques accepted by
knowledgeable practitioners
Documentation needs may change since
the work product is subject to discovery
and cross-examination.
6
7. Lost Profits
The goal is to put the plaintiff is the
same position as it would have been
“but-for” the defendant’s actions
that gave rise to the alleged
damages
7
8. Lost Profits
Lost profit damages are typically
measured for a specific, limited,
time period (and not into
perpetuity).
8
9. Lost Profits
General Approach
The loss is the difference between
the profits the business would have
earned during the loss period, less
what it actually earned during the
loss period
9
10. Two ways to perform the calculation
Using all of the company’s expenses
in both the “would have” and “did”
scenarios (usually only the variable
expenses and some other expenses
differ; fixed expenses continue
under either scenario).
10
11. Two ways to perform the calculation
Using only incremental revenues
less avoided costs
In either case, the result should be
the same – mixing these concepts
causes trouble
11
12. Lost Profits
If losses extend into the future,
they are present valued at the
appropriate discount rate, usually to
the date of the trial
12
13. Business Valuation
Determine the business’s lost future
cash flows into perpetuity (what the
business would have produced,
using all revenues and expenses)
13
14. Business Valuation
Discount lost future cash flows to
present value as of shutdown date
Question: Enterprise value or equity
value?
14
15. Lost Profits
Profits or cash flow?
Does this matter? (In operating
businesses, is cash flow usually
higher or lower than earnings?)
Do older lost profits court cases
contemplate cash flow?
15
16. Lost Profits
Considerations related to loss period
determination include changes in:
Competition
Technology
Regulation
Economy
Real-world events (9/11)
16
17. Duty to Mitigate
A duty to mitigate is imposed on the
claimant. This could also apply to
business valuation, for example
related to salvage value.
The Eighth Circuit in 2007 noted:
“Calculating the value of an asset
at liquidation or disposition is a
necessary part of the discounted
cash flow analysis.”
17
18. Mitigation issues
Lost Profits
Business Valuation – If a DCF shows
a negative “value” is the business
worth nothing?
18
19. Case Example: Damages from
Failure to Deliver Fixed Assets
Seller estimated the fixed assets
that would be included in the sale
Purchaser was only able to find
90% of the income-producing fixed
assets that they expected.
Economist hired by the purchaser
estimated lost profits of $750
thousand for the next twenty years.
What is wrong with this picture?
19
20. Lost Profits
Courts have been reluctant to award
lost profits damages over extended
periods due to the speculative
nature of the underlying projections
20
21. Business Valuation
How are the cash flows used in the
income approach portion of a
business valuation determined?
21
22. Business Valuation
Eighth Circuit also noted that “Delaware
courts and the financial community have
recognized the discounted cash flow
model as a preeminent valuation
methodology.”
Fifth Circuit in 2004 noted that lost asset
damages from a breached agreement
were “determined by considering what a
hypothetical buyer would pay for the
chance to earn future profits.”
22
23. Case Example: Acquisition of a
Financing Company
Accounting firm advised purchaser of a
financing company on the appropriate
accounting treatment for the purchase
price.
Substantial amount was assigned to
goodwill by the accounting firm.
In subsequent years the goodwill was
deemed to be unimpaired by DCF analysis
performed by the accounting firm even
though the Company lost $$$ millions.
What is wrong with this picture?
23
24. Do the Research
Understand near term future of
subject
Company
Industry
Economy
Other conditions
24
25. Subsequent Events
Business Valuation – Generally, a
business valuation will not take
into account subsequent events
unless the facts were known or
knowable.
Lost Profits – A lost profits analyst
must take post-breach events into
consideration.
25
26. Estimates at a tipping point
Would there be a difference between
an estimate of business value with
a valuation date of 8/31/08 and an
estimate of lost profits from an
event occurring on that date?
What happened to change the world
after that date?
26
27. Income Taxes
Lost Profits
Lost profit damages are usually
taxable income to the recipient
Avoid double deduction for taxes
(once during the calculation and
second upon actual payment)
Lost profits computation doesn’t
take into account income taxes
27
28. Income Taxes
Business Valuation
Lost business value is the price a
willing buyer would pay to a
willing seller
Hypothetical buyer seeks a cash
return on a business investment
after payment of all business
expenses, including income taxes.
28
29. Case Example: Valuing a
Healthcare Practice
Pass-through entity being sold to a
nonprofit entity
IRS and OIG for HHS require that business
valuation estimates treat the business as
though it was a tax-paying entity.
National valuation firm took projected
income, applied depreciation expense,
and calculated hypothetical tax burden on
the balance in order to estimate cash
flows.
What is wrong with this picture?
29
30. Discount Rate
Lost Profits
Based on:
Risk-free rate
Risk assessment, or
Plaintiff’s use of funds
Business Valuation
Based on:
Risk assessment
30
32. Thank you for participating
James F. Hart
Managing Director, Lightfoot Group
jhart@lightfootgroup.com
Bill Black
William H. Black, PC
whb@billblackcpa.com
32