A competitor, contractor or other third party has taken actions that have damaged your client’s business in the form of lost profits. How do you measure the lost profits? Must you demonstrate lost profits with certainty? Over what period do you measure the lost profits? If your client has not recovered fully, can you include estimated future lost profits? These are all important questions in a lost profits case. This webinar addresses those questions and summarizes the different methods to measure lost profits, as well as some of the critical elements that must be considered in developing and presenting your damages theory in court. To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/valuing-lost-profits-for-litigation-purposes-2021/

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2. 2
Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.

3. Disclaimer
The material in this webinar is for informational purposes only. It should not be considered
legal, financial or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
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5. Meet the Faculty
MODERATOR:
John Levitske - Ankura Consulting Group, LLC
PANELISTS:
Michael Pakter - Gould & Pakter Associates LLP
Richard Claywell - J. Richard Claywell CPA
Brian Lappen - Plante Moran
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6. About This Webinar
Valuing Lost Profits for Litigation Purposes
A competitor, contractor or other third party has taken actions that have damaged your client’s
business in the form of lost profits. How do you measure the lost profits? Must you
demonstrate lost profits with certainty? Over what period do you measure the lost profits? If
your client has not recovered fully, can you include estimated future lost profits? These are
all important questions in a lost profits case. This webinar addresses those questions and
summarizes the different methods to measure lost profits, as well as some of the critical
elements that must be considered in developing and presenting your damages theory in
court.
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7. About This Series
Valuation 2021
What’s it worth? Whether you are engaged in the sale of an asset or attempting to recover damages in
litigation, valuations are often necessary for convincing the other side that your price is right. In
transactions, valuations assist parties in determining the price they are willing to pay or receive in the sale
of a security, business, or asset. In litigation, valuations play a critical role in setting a baseline for
damages awards. Expert assistance is required to accurately value many assets, whether it is a
business, a security, an intangible asset such as intellectual property or a brand, or lost profits in a
litigation context. Choosing the appropriate valuation expert can make or break your transaction or your
case, given the extensive battles between valuation experts that arise in contested matters. This series
provides an overview of valuation in its many contexts, from business valuations in transactions to battles
between valuation experts in all aspects of litigation.
Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and
executives without much background in these areas, yet is of primary value to attorneys, accountants, and other
seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to
entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that
participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
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8. Episodes in this Series
#1: What's it Worth? Valuing a Business for Sale
Premiere date: 2/3/21
#2: Valuing Lost Profits for Litigation Purposes
Premiere date: 3/3/21
#3: Selecting the Right Valuation Expert
Premiere date: 4/7/21
#4: Minority and Illiquidity Discounts
Premiere date: 5/5/21
#5: Valuing Your Brand and Other "Soft" Assets
Premiere date: 6/2/21
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9. Episode #2
Valuing Lost Profits for Litigation Purposes
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10. What are the Different Types of Damages that can be
Recovered in a Lawsuit?
• Actual or compensatory damages – to compensate for proven injury or loss
• Nominal damages – awarded if an injury has been suffered, but no loss has occurred
• Punitive – in addition to other damages and available if defendant acted with malice,
recklessness or deceit
• Damages are intended to put the injured party in as good a position as he or she would have
been absent the wrongful act
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11. Lost Profits
• An element of economic or compensatory damages
 The harm suffered by the plaintiff as a result of the wrongful act of the defendant
 Determined, with reasonable certainty, based on statutory rules and regulations or prior
decided court cases
• Consider if profits or the entire business has been lost
 If profits lost, measure net (not gross) profits lost
 If entire business lost, measure lost business value as an alternative to lost profits
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12. To Prove Damages, Plaintiff Must Show…
• Wrongful act of the defendant caused a loss
• The amount of the loss can be estimated with reasonable certainty
• For certain contract claims, an additional element to be proved must be that the loss incurred
was foreseeable at the time the contract was entered into by the parties
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13. Questions to Consider in Determining Lost Profit
Damages
• What caused the loss?
• Who caused the loss?
• Might other things have caused the loss?
• What is the best measure of the loss?
• What is the period of damages?
• What kind of financial and operational information is available?
• What is the capacity of the business?
• What are the primary risk factors facing the business?
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14. What Role Does an Expert Play in Litigation?
Do I need One?
• Expert witness: Provide an objective and independent perspective before a trier of fact – at a
deposition, before a court, or in arbitration
 An expert’s work is frequently discoverable including correspondence, notes, analyses,
research, drafts, and workpapers
 It is important to realize this at the outset of an engagement
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15. What Role Does an Expert Play in Litigation?
Do I need One?
• Expert consultant: provides research, discovery, analysis, and may assist in fact finding,
strategy, and identifying potential issues
 Does not usually provide testimony
 The work of a consultant is generally considered attorney work product and protected from
discovery (when attorney engages the consultant)
 If the consultant becomes a testifying witness, all prior work is discoverable including that
performed while a consultant
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16. Standards for Expert Testimony
• Frye – demonstrate expertise and apply methods/theories that are generally accepted
• Federal Rule of Evidence 702 – a qualified expert may testify if the testimony is relevant and rests
on reliable foundation
• Daubert – Federal Rule of Evidence 702 superseded Frye and concluded that methods do not
have to be generally accepted as long as testimony is relevant and reliable
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17. Daubert Challenge to Expert Witness
• The judge is the gatekeeper and considers the Daubert factors to determine admissibility of an
expert’s testimony
 Theory or technique used can be or has been tested
 Theory or technique has been subjected to peer review
 Potential error rate is determinable, or standards exist for error rate that is acceptable, and
 Theory or technique enjoys widespread acceptance in the profession
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18. Expert Qualifications
• An expert must demonstrate:
 The requisite training, skill, knowledge, and/or experience in the field
 The facts, data, assumptions and other documentation that were relied upon in forming
conclusions and opinions
 The basis for the conclusions and opinions, including the methodology used
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19. Proving Lost Profits
• Proximate causation – must be a link between the wrongful act and the damages
• Plaintiff must have tried to mitigate damages and cannot claim loss to the extent that damages
were mitigated
• Lost profits must be proved to a reasonable degree, but not with entire certainty
• Loss is mitigated to the extent that plaintiff’s actions/negligence contributed to loss
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20. Proving Lost Profits
• Proximate causation: there must be a causal link between the wrongful act and damages
claimed
 Transaction causation: “but for” the wrongful act, no loss would have occurred
 Loss causation: the loss is related to the wrongful act
 Both are required, but the wrongful act does not have to be the sole cause of the loss
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21. Proving Lost Profits
• Only lost net profits are allowed as damages
• Lost profits can only be claimed over the “loss period”
 Usually begins with the date of the wrongful act or later
 The end of the loss period is usually the end of the term of a contract, a return to customary
levels of profit or some “foreseeable period”
 Sometimes the damage is permanent
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22. Market Share Approach
• Based on the difference between the plaintiff’s market share had there been no damage and its
market share after the damaging act
• When it’s appropriate:
 When reliable market share data exist
 When plaintiff company products/services fit within “market”
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23. Market Share Approach
• Strengths:
 Can provide objective, reliable basis for estimating
 Other companies in “market” are independent of the damaging act
 Accounts for changes in the industry during relevant period
• Limitations:
 Difficult to determine market share (due to lack of data, comparability)
 Difficult to assess due to dynamic markets
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24. Before and After Approach
• Based on a comparison of the plaintiff’s sales before the damaging event with plaintiff’s sales
after the event, either actual sales or a projection of sales that would have been achieved in the
absence of the wrongful act (“but for” sales)
• When it’s appropriate:
 When reliable historical data exists
 When growth trends are predictable
 In relatively static comparative environments
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25. Before and After Approach
• Strengths:
 Relies on plaintiff’s actual, historical financial results as a basis for comparison to estimated
future results
 Courts often favor financial projections based on past results
• Limitations:
 Requires sufficient historical data
 May not account for changes in the industry/economy
 Periods before and after damaging act may not be comparable
 Unavailable for newly established firms or start-ups
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26. Yardstick Approach
• Based on a benchmark or “yardstick,” a similar business unaffected by the damaging act – e.g.,
a comparable company, division or industry benchmark
• When it’s appropriate:
 When a reliable yardstick exists
 With newly established firms
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27. Yardstick Approach
• Strengths:
 Can provide objective, reliable benchmark for estimating
 Yardstick is independent of effects from damaging act
 Accounts for changes in industry or market
 Accounts for differences in time periods
• Limitations:
 Lack of comparability between plaintiff and yardstick (e.g., size, sales channels)
 Yardstick data may not be available
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28. Sales Projection Approach
• Based on a sales projection that was prepared prior to the damaging act or reflective of the
terms of a contract
• When it’s appropriate:
 When a sales projection was prepared prior to the damaging act
 When a stable trajectory of existing orders exists
 When expected sales can be estimated from contract terms
 May be appropriate for newly established firms if orders/contracts exist
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29. A Simple Average or Simple Regression Might Not
Provide A Supportable Damage Number?
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30. Sales Projection Approach
• Strengths:
 Can provide specific objective, reliable estimate
 Estimates of volumes and pricing agreed to by the parties to a contract
 May reflect actual orders
• Limitations:
 More uncertainty with respect to sales beyond the period of existing orders/contract terms
 Must demonstrate ability to fulfill the orders/projection
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31. Choosing the Right Approach
• Consider the availability of information – from the company, the industry, competitors, industry
analysts, etc.
• Consider the following factors prior to the damaging act:
 Were plaintiff’s sales trends steady and predictable?
 Did the plaintiff have orders in hand?
 Were plaintiff’s sales trends comparable to another company or industry as a whole?
 Which approach is most consistent with the facts in the case and market conditions during
the damage period?
 Is the company’s financial information reliable?
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32. Avoided Costs
• Lost profits as measured by:
 Lost incremental sales/revenue
 Less avoided incremental costs – those costs that would have been incurred with the
generation of the lost revenues but were not
 Plus costs that were incurred to mitigate damage that would not have otherwise been
incurred if the revenue had not been lost
• Fixed vs. variable costs:
 Depends on loss period: fixed over loss period or semi-variable
 Some costs may have been incurred prior to the damage
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33. Estimating Future Profits
• Must be based on reliable information and reasonable assumptions
• Common sources for estimating lost sales/revenue:
 The plaintiff’s actual prior and subsequent experience
 The plaintiff’s capacity for growth
 The plaintiff’s budgets, forecasts, or projections
o Prepared prior the damaging event in the normal course of business
o History of plaintiff’s ability to achieve budgets and forecasts
o Who specifically prepared budget/forecast and for what purpose
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34. Estimating Future Profits
 Sales of identified lost customers
 The experience of other comparable businesses, locations, business units or divisions
 The defendant’s subsequent experience (i.e. sales, customers that were taken)
 Industry averages/trends (i.e., yardsticks)
• Recovery of lost profits are limited to the loss period
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35. Measurement Date
• Lost profits occur over time but are quantified at a date certain:
 Dating back to the wrongful act (ex-ante)
 Dating to trial date (ex-post)
• If ex-ante, all lost profits are discounted to the date of the wrongful act
 Often cannot use information unknown until after the wrongful act
 Some jurisdictions will allow pre-judgment interest – bringing the value forward to judgment
date
 Some states require an ex-ante analysis
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36. Measurement Date
• If ex-post, past lost profits during the loss period up to the date of the trial are accumulated to
the trial date and future lost profits during the loss period subsequent to the date of trial are
discounted to present value
 Usually information known after the date of the wrongful act but prior to trial can be used
 Accumulation of lost profits to trial date may require interest
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37. Interest
• Pre-judgment interest: bringing lost profits to the date of judgment
 May or may not apply depending on jurisdiction and relevant statutes
• Post-judgment interest: bringing the lost profits to the date of payment subsequent to the
judgment
 Accounts for time-value of money until payments are made
• Choosing the right interest rate:
 Basis: the rate that would compensate the plaintiff appropriately
 Risk vs. required rate of return: principle that investors require higher return for higher risk
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38. Interest and Risk Profiles
• Statutory: lowest risk profile
• Yields on U.S. Treasury Securities: risk free
• Prime lending rate: low risk
• Company’s average cost of borrowing: lost risk
• Company’s weighted average cost of capital: risk profile depends on risk of company
• Company’s cost of equity (required rate of return of investors in company): high risk
• Risk factor relative to the risk inherent in projection: highest risk
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39. Other Issues
• Risk adjusted lost profits vs. risk adjusted discount rates
 Adjusting lost profits to a riskless stream or “certainty equivalents”, then discounting at the
risk-free rate
 Risk-free rate implicitly includes “real” rate of return and expected inflation
 Adjusting discount rate for the perceived risk in the lost profits rather than the lost profits
stream
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40. Other Issues
• Methods of estimating risk adjusted discount rates
 Risk vs. required rate of return
 Capital asset pricing model
 Build-up model
• Present value factors
 Stub periods
 End of period vs. mid-period discounting
 Seasonality adjustment
o
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41. Taxation
• Compensatory damages are generally taxed as ordinary income to the party receiving the
damages
 Damages calculations are usually prepared with pretax lost profits and discounted using
after-tax discount rates
o This methodology leaves the plaintiff whole after the payment of taxes on the
damages award
 Alternatively, the lost profits could be determined on an after-tax basis, discounted and then
grossed up for the taxes that will be paid on the awarded damages
 Both methods result in the same amount and leave the plaintiff in the position he/she would
have been there had there been no wrongful act
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42. Lost Profits Claim Defenses
• Causation
 Must be causal link between wrongful act and damages
 Did plaintiff’s acts cause damage or contribute to the damage – negligence
 If more than one act caused the damages, the lost profits should be quantified separately
for each act to the extent possible
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43. Lost Profits Claim Defenses
• Lack of attempt/effort to mitigate
 Plaintiff has an obligation to make an effort to mitigate damages
 Cannot recover damages where the loss was foreseeable and could have been avoided
without undue cost
 Cannot recover lost profits beyond the period that would reasonably be required to recover
(no windfalls)
 Reasonable expenses incurred in attempts to mitigate are recoverable
• Maximize avoided costs, maximize lost “net” profits
• External factors responsible
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44. About the Faculty
44

45. About The Faculty
John Levitske - John.Levitske@Ankura.com
John Levitske, CPA/ABV/CFF/CGMA, ASA, CFA, CFLC, CIRA, MBA JD serves as a
business valuation, forensic accounting and damages expert witness, arbitrator, and advisor.
He provides business valuation, forensic accounting, purchase price analysis, damage
quantification, and dispute resolution services in complex commercial situations. He testifies
as an independent expert witness in disputes, both domestic litigation and international
arbitration, regarding issues of valuation, finance, accounting (e.g., GAAP) or damages. He
also acts as a neutral expert determiner or neutral arbitrator and advises clients in mediations
and negotiations. He is frequently consulted regarding business disputes, shareholder
disputes, M&A transaction disputes and bankruptcy.
To read more, go to https://www.financialpoise.com/webinar-faculty/john-levitske/
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46. About The Faculty
Michael D. Pakter - mpakter@litcpa.com
Mr. Michael D. Pakter has 40 years of experience in accounting and forensic accounting, business
economics and investigations in numerous industries and diverse engagements, including more than 20
years of experience in economic damages and business valuations.
He has participated in public hearings and alternative dispute resolutions, submitted expert reports in
several jurisdictions and testified in arbitrations, regulatory proceedings and litigated disputes. State,
Federal and Bankruptcy Courts, as well as arbitral bodies, have recognized him as an expert in
accounting, financial analysis, forensic accounting, economic damages, business valuation and business
economics.
Mr. Pakter is a Certified Public Accountant (“CPA”), registered and licensed in the State of Illinois. The
American Institute of Certified Public Accountants (“AICPA”) has recognized him as additionally Certified
in Financial Forensics (“CFF”) and Management Accounting (“CGMA”). He can be reached
at312.229.1720, mpakter@litcpa.com or via www.litcpa.com.
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47. About The Faculty
Richard Claywell - richard@biz-valuation.com
Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business
Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist,
Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified
in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies
since 1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit
planning. Richard received his Bachelor of Science in Accounting in 1979 from the University of Houston – Clear
Lake. He then received certification as a Public Accountant in 1983. Over the years, Richard has earned additional
accreditations that relate to business valuations, economic damages and fraud. Richard has been an instructor for
the National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal
Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is
currently the Director of Education for the IACVA and is responsible for the business valuations materials being
taught in 55 countries. Richard has taught business valuation or economic damage courses in China, Korea, Taiwan.
Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County Court,
Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages
(lost profits), shareholder disputes, personal injury, wrongful termination and divorce.
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48. About The Faculty
Brian Lappen - brian.lappen@plantemoran.com
Brian Lappen is a Senior Manager with Plante Moran’s Forensic and Valuation Services group in Chicago.
With more than 19 years of forensic, litigation, and advisory experience, Brian brings significant experience to
clients involved in forensic and litigation support matters. Over his 18 years of experience, Brian has consulted
clients on a wide variety of forensic investigations involving fraudulent financial reporting and asset
misappropriation and also has extensive experience assisting clients in the prevention and detection of fraud,
including the assessment, enhancement, and implementation of anti-fraud programs and controls. Brian’s
litigation support experience with clients is extensive, including assisting clients with contract disputes,
shareholder disputes, professional liability matters, business interruption claims, and disputes involving the
calculation of lost profits. Brian has also served clients involved in post-acquisition disputes, including working
capital disputes, earn out disputes, and breaches of representations and warranties, for matters involving the
GAAP treatment of accounting items relevant to the post-close calculation. Brian earned a Masters of
Accountancy degree in accounting from the University of Wisconsin – Madison. He is a Certified Public
Accountant in the states of Wisconsin and Illinois and is also a member of the American Institute of Certified
Public Accountants.
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49. Questions or Comments?
If you have any questions about this webinar that you did not get to ask during the live
premiere, or if you are watching this webinar On Demand, please do not hesitate to email us
at info@financialpoise.com with any questions or comments you may have. Please include
the name of the webinar in your email and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes
only. It has been prepared primarily for attorneys and accountants for use in the pursuit of
their continuing legal education and continuing professional education.
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50. About Financial Poise
50
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