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Forensic Accounting Industries

Lost Profits

A business can lose profits simply by an individual’s intentional (or unintentional) act. The event can be caused by a multitude of factors, including fraud, contract disputes, and defamation. Lost profits can be a complex and emotionally devastating event for any business. A business may suffer lost profits when an individual’s wrongful conduct causes:

  • Revenues to be lower than expected
  • Expenses to be higher than expected
  • Both of the above items to occur

This situation is frustrating for the business owner. The owner did not cause the situation but suffers from the wrongful conduct.  The damages from the lost profits can sometimes be so severe that the business never commences operations again. Most business can litigate for the damages caused by this type of event.

The most common type of lost profit damages are:

  • Special Damages
  • Exemplary Damages
  • General Damages
  • Liquidated Damages

When these events happen, the business and legal counsel will need assistance to determine the amount of damages. They need an expert who understands the proper methods and calculations in a lost profit case.

At Hovland Forensic & Financial we utilize our experience to provide an expert calculation and report. First, we analyze the event to determine which generally accepted method fits the situation. The methods we employ are:

  • Before-and-After Method – This approach compares the actual results of an operation before the event and the results afterward.
  • Yardstick Method – This method compares the results of operations after the event to a measure representing what operations would have been “But-For” the event.
  • Sales Method – This method is a calculation of damages based on creating a “But-For” financial projection and comparing this to actual performance.

Each of these methods allow us to calculate and support the lost profits. As part of our calculations, we will:

  • Analyze historical operations.
  • Determine if the damage period is finite, and when will the business fully recover.
  • Perform an analysis on the industry as a whole and understand how the business fits into the market.
  • Determine what mitigation steps the business utilized.
  • Review lost customers.
  • Calculate increased costs.
  • Determine saved expense, if any.
  • Estimate the total net profit loss, and when the business will be made whole.
  • Provide expert testimony.

Our lost profit damages reports are compiled using one of the accepted methods. Each calculation and assumption will be supported by exhibits. We believe there should be no doubt as to how a number was derived and the impact on the business. The report is a key piece of the litigation and needs to stand on its own.

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