What methods are used?
The ‘before-and-after’ method deals with the internal data and financial trends. For example, you might look at a company’s past three years and determine an average percentage of growth that occurred. From there, use that percentage to go forward from the day the damage occurred.
If the expert determines that the past trend has been that sales were increasing by 6 percent each year, then he or she might estimate what would have happened after the date the damages occurred to be a 6 percent annual increase. That gives you your projected revenues. Then you calculate your costs associated with those revenues and that tells you what would have happened but for the fact that there were damages. You then subtract the actual sales and associated costs that occurred with the damages and that gives you your lost profits and damages.
The ‘yardstick’ method uses some kind of benchmark or standard figure. For example, the expert looks at what type of growth trends have occurred in similar businesses and looks for comparisons. If you’re a widget manufacturer, then he or she finds another company that makes something similar and finds out what that competitor’s growth has been. The expert then uses that as an estimate of growth and to come up with lost profits. Your benchmark is that other growth from similar businesses in similar situations.
How can a company ensure the financial expert has everything needed to arrive at a conclusion?
The ideal situation is when the company itself has done a summary of what it believes the damages are. It supplies any and all documentation that supports what happened compared to what would have happened. Companies can provide their budgets or any projections they’ve done or are continuing to do. They should make sure they identify for the expert exactly what revenue was lost. For example, if you have five product lines and one line that was damaged, you want to identify that one line along with bulk revenue numbers.
You want the expert to be working with the best available information within the context of the case. The expert usually doesn’t just go in and have total access to any and all information. He or she should have access to information that is produced in the strategy of the case.
Certainly, a company can still make sure the description of the company and its history is made available to the expert. You want to make sure the expert has a very good idea of who you are as a company, so that when the expert makes assumptions or does projections, he or she can do it with a greater feel for what makes sense.
Richard Squar is the Tax & Litigation Support director at Glenn M. Gelman & Associates, CPAs and Business Consultants. Reach him at (714) 667-2600 x254 or [email protected].
