Lost Profits and Lost Business Value-What is the Difference

Damage remedies  focus on lost profits and lost business value with such remedies calculated by financial experts. Although lost profits and lost business value are common calculations in business litigation, there are distinct differences between these two remedies.

A fundamental difference between lost profits and lost business value is the expected duration of the loss. Lost profits are a measure of damages when a business continues to operate but has reduced income. The damage period is limited with the measurement of the lost profits calculated for a period until the business recovers the profits that would have occurred ” but for” the alleged damaging act. While lost business value occurs when a business ceases all operations or losses a segment of a business caused by the alleged damaging act. The damage period is into perpetuity as the business earning capacity is permanently lost.

The difference between lost profits and lost business value may appear simple but the underlying facts and circumstances of each business litigation can be ambiguous. In many cases, the extent to which a business will recover from the alleged damaging act is not clear at the time damages are calculated and the financial expert must make a determination based on the best available evidence. Additionally, the consideration of mitigation  adds to the complexity of lost profits and lost business value calculations as the plaintiff generally has an obligation to mitigate to limit their losses and the defendant has the burden of proving mitigation of losses has occurred.

The financial expert must also consider the the definition of value where the alleged damaging act occurred when calculating lost business value. Different standards of value can cause significantly different value conclusions which can be rendered meaningless by the court if it conflicts with state law .

The misunderstanding of the differences between lost profits and lost business value can lead to damage calculations double counting income in both lost profits and lost business value calculations. Although laws vary by jurisdiction, all courts agree that the double counting of lost profits and lost business value damages are not allowed. However this does not prevent a damage remedy counting lost profits and lost business value where each covers a different time period.

It is important for the financial expert witness to have a thorough understanding of the complex relationship between lost profits and lost business value and to prepare a relevant report with a reliable opinion  to withstand a court challenge and to prevent his or her opinion from being excluded .