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

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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

Year 1 Year 2 Year 3

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



© 2016 Tressler LLP © 2016 Tressler LLP

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Lost Profits Presentation