In commercial litigation, valuation experts are often retained to evaluate commercial and economic losses that can typically arise from a claim of breach of contract or negligence. These losses can generally be classified as:
a) Lost Profits and/or
b) Loss of Business Value.
The key distinction is the duration or disruption of the commercial and economic loss.
Lost Profits
refer to a temporary reduction in income or revenue that a business would have incurred if the disruptive event had not taken place. Consider if a business has its services temporarily halted by a fire or a flood. This type of loss is considered recoverable, indicating that the business will likely approach its previous profit levels before the occurrence of the disruptive event. A general principle undertaken by the courts is to return the plaintiff to the approximate position that they would have been in if the underlying had not occurred.Loss of Business Value
signifies a fundamental change in the financial health of the business that has a lasting, and potentially permanent, impact. For instance, consider a situation where a supplier sells a defective or contaminated product to a business, which ultimately causes injury to a customer or end-user. This type of incident could have a lasting impact on the brand of the business who sold the product, even though it may not have been responsible for the defect.There are numerous methods to value Lost Profits, with the most prominent being the “With or Without” analysis. The “With or Without” analysis is a two-step process. The first step is to calculate the profits of a business with the harm. The second step is to calculate the profits of a business ‘but for or without’ the harm. The difference between the two calculations would be the Lost Profits.
Since the Lost Business Value refers to a permanent loss of Business Value, a business valuation approach is more suitable to calculate the damages. A CBV or other financial expert would calculate the cash flows a business would generate (including future cash flows) ‘but for’ the breach or the harm to the business..
Another distinction between Lost Profits versus Loss of Business Value is use of pre-tax or after-tax cash flows. In the case of Lost Profits, the incremental pre-tax cash flows are used to determine the Lost Profits whereas, after-tax cash flows are used to determine the Lost Business Value, which is typical for valuation methodology.
One may ask what happens when there is a brief disruption followed by permanent impact or cessation of the operations of a business (often referred to as “Slow Death”). In such cases, the Courts have generally held that Loss of Business Value may be considered in addition to Lost Profits in order to remedy the damages.
GG Observations
When events occur that result in a business suffering economic and financial losses (e.g. breach of contract, patent infringement, etc.), or having its operations interrupted (e.g. a fire or flood), a CBV can be engaged to assist in quantifying the damages suffered, in order to assist in an equitable resolution.
If you or your client require the services of a CBV, please feel free to reach out to Grewal Guyatt LLP. Our team of business valuators and litigation support experts are ready to assist with any of the services outlined above, and more.
