Good news/bad news/good news on lost profits analysis

BVWireIssue #74-3
November 19, 2008

Ninety percent of the argument in ninety-five percent of the [lost profits and economic damages] cases is the ‘easy stuff,’ Brian Brinig of San Diego’s Brinig & Company, Inc., told a jam-packed session at the recent AICPA/ASA National BV Conference in Las Vegas.  That’s the good news for valuation experts who take on what can often turn out to be time-consuming, intense litigation engagements.  “The number of times I’m actually in an argument over the discount rate is few and far between,” Brinig told attendees.  “In general, in the small business damages cases I do, I’m not spending my time arguing the discount rate but in defending the basis for my conclusion and projections: why the lost profits should be what they are.”

So what’s the bad news for BV experts in economic damages?  Well—there are those tough cases concerning start-up businesses or businesses that never got off the ground “but for” the bad acts of the defendant.  Think of the small business that claims it would have been the next Microsoft had the bank kept its line of credit instead of canceling it.  “Good luck with those,” Brinig quips.  “Get a bigger retainer.”  Or get on the defendant’s side—which, he says, he does “much more happily.  And they can usually afford to pay better.” 

And then there is the issue of calculating the discount rate for lost profits and/or lost business value.  When Brinig gave the audience five choices for the most appropriate rate to apply when present valuing future losses (the risk-free rate, the “business valuation” rate, investment value, another rate, or—“it depends”), the vast majority of attendees selected the latter.  In some jurisdictions, is the rate governed by state law?  Will your attorney school you on this? (“Good luck with that one,” Brinig says. “The cases are muddled.”)  And what about the timing of the valuation—should you use an ex post or ex ante approach to the analysis?

The best news: The timing couldn’t be better for the impending release of BVR’s Comprehensive Guide to Lost Profits Damages, edited and authored by Nancy Fannon. Contributors also include Michael Crain, Dr. Bill Kennedy, Bob Gray, Tom Burrage, Michael Kaplan, Mark Dietrich, professor Robert Lloyd of the University of Tennessee College of Law, and many more.  The 19 chapters will cover all critical aspects of lost profits calculations, from the basic methods and procedures to establishing evidence and defending Daubert challenges; from distinguishing lost profits from lost business value to discounting the damages measurement; from cases concerning intellectual property to those to regarding auto dealerships, construction firms, government contracts, and medical practices.  The all-encompassing Guide will be available in early 2009 at; look for updates in the near future.

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