What’s the difference? Lost profits and business valuations

How do we piece together economic damages in lawsuits involving allegations of harm to a businesses?

Lawsuits involving alleged economic damages to a business often feature economic experts who provide analyses and testimony assessing the impact of the defendant’s actions on the plaintiff. In this short article, we will explore the difference between damage analyses that focus on lost profits, and business valuations.

Business valuations aim to calculate the actual value of the business in comparison to the value the business would have had, ‘but-for’ the actions of the defendant. A business valuation is an appropriate analysis for an economic expert to perform when a business alleges permanent value impairment. Cases that involve defamation, slander, or intentional destruction of a business are often ideal for business valuation analyses.

Lost profit calculations measure the difference between the expected profits, had the harm not occurred, and the actual profits. Cases that involve allegations of intellectual property infringement or breach of contract, an economic expert is more likely to perform an analysis of lost profits. This type of calculation is ideal when damages have a specific beginning and ending date.

In some cases, there is a need for both analyses to be performed, but it is important that the calculations do not duplicate or overlap identified damages. Lost profit calculations and business valuations could hypothetically produce the same measure of damages, but it is more likely that factors such as time period and discount rate will yield different results.

Additional reading:

Brian Brinig, J.D., C.P.A.’s paper ‘Business Damages: Lost Profits or Lost Business Value‘?

Dwight Steward, Ph.D.’s ‘Business Lost Profits Primer‘

Philip Saunders, Jr., Ph.D.’s publication ‘Business Disruption – Calculating the Damages‘