1. A Global Reach with a Local Perspective
www.decosimo.com
Understanding and Calculating Lost
Profits Damages

2. Agenda
 Elements of Lost Profits Damages Claims
 Defining Lost Profits
 Methods of Calculating Lost Profits
 Timing Considerations

3. Elements of Lost Profits Damages Claims
 Caused by Defendant
 What’s the link?
 Foreseeable by Defendant
 Should Defendant have known that damages would
occur?
 Reasonably Certain
 Is the fact of damages (not necessarily the amount of
damages) reasonably certain?

4. Reasonable Certainty
 Damages are not rendered uncertain because they cannot
be calculated with absolute exactness. It is sufficient if a
reasonable basis of computation is afforded, although the
result be only approximate.
Eastman Kodak Co. v. Southern Photo Materials, 273 U.S. 359 (1927)
 Once an injured party proves that it has been damaged,
the amount of the damages need not be proved with
certainty or mathematical precision. After the fact of
damages has been established, less certainty is required
with regard to the amount of the damages.
Waggoner Motors, Inc. v. Waverly Church of Christ, 159 S.W.3d 42 2004
Tenn. App.

5. Defining Lost Profits
 The difference between what you should have made
on whatever transaction or series of transactions
occurred or should have occurred and what you
actually made on whatever transaction or series of
transactions actually occurred

6. Definition of Profit
… the difference between the purchase price and the
costs of bringing to market whatever it is … in terms of
the component costs of delivered goods and/or
services and any operating or other expenses
http://en.wikipedia.org/wiki/Profit_(accounting)
6

7. Michael Scott on Wikipedia
Wikipedia is the best
thing ever. Anyone in
the world can write
anything they want
about any subject. So
you know you are
getting the best
possible information.
--- Michael Scott – The Office

8. Five Aspects of Lost Profits
Lost profits are:
1. Net
2. Incremental
3. But-for
4. Pre-tax
5. Reasonably certain

9. Net Profits
 In Tennessee, the recovery of lost profits must be
based on net profits and not on gross profits.
American Buildings Company v. DBH Attachments, Inc. 676 S.W.2d 558;
1984 Tenn. App
 In cases involving the loss of expected profits from
the sale of goods, the expected net profits equals the
expected revenue from the sale of the goods minus
the cost of the goods sold minus all of the seller’s
expenses fairly attributable to the sale of the goods.
Waggoner Motors, Inc. v. Waverly Church of Christ, 159 S.W.3d 42 2004
Tenn. App.

10. Incremental Profits
 Do “fairly attributable” expenses include fixed
overhead items?
 In Waggoner Motors v Waverly Church of Christ,
Appeals Court says (in a footnote),
“Fixed overhead expenses, i.e., expenses that the
injured party would have incurred notwithstanding the
wrongful act, should not be deducted from gross
revenue.”
In agreement with most cases that have considered the
argument that fixed overhead must be included (per
Dunn, Recovery of Damages for Lost Profits)

11. Pretax Profits
 Lost profits damages awards are taxable to the
recipient
 An award of after tax lost profit would be further
reduced by taxes when received by the Plaintiff
 An award of pretax profits makes the Plaintiff whole

12. Methods of Calculating Lost Profits
 Before and After
 Sales Projection
 Accounting for Profits
 Yardstick
 Market Share
 Economic Modeling

13. Before and After Calculations
 Based on time series data
 Compares profit before bad act to profit after bad act
 Typically more suited to stable businesses or
contractual relationships
 Did other things change during that time?

14. Before and After Calculations
 Method used by expert in Waggoner Motors
 Post incident performance of plaintiff was compared
with performance by the plaintiff during the 3
preceding calendar years
 Did other things change during that time?
 Appeals Court determined that there were other
factors and time periods to take into consideration.
Use of plaintiff’s financial records deemed
appropriate, but must take other factors into
consideration

15. Sales Projection Method
 Compares actual performance after the bad act with
a forecast of performance before the bad act
 How reliable is the forecast? Who prepared it and
what is it based on?
 Can be applicable to –
 existing company opening a new line, new product,
new service
 new company entering business or industry

16. Accounting for Profits Method
 Relies on the accounting records of a party other
than the Plaintiff (typically the Defendant) to
establish sales or profits
 Common in cases where the Defendant is accused of
breaching a purchase/supply contract and made the
purchases in question from another supplier
 Can break down if the profits of the third party are
not reasonably related to the but for profits of
Plaintiff

17. Yardstick Method
 Compares profits in each period to a yardstick
 More relevant for companies without an established
history of operation and for which relevant yardstick
entities can be found
 Requires the ability to argue that the entity in
question would also have experienced essentially
the same results as the industry statistics or other
yardstick used

18. Market Share Method
 Assumes a certain market share would have been
achieved or maintained
 Uses market share information to determine lost
sales
 How reliable is data on the size of the total market?
 How reasonable is the assumption regarding
Plaintiff’s share?

19. Economic Modeling Method
 Catch all for other ways of determining lost sales or
lost profits
 How reasonable is the model?

20. Timing Considerations
 Damages happen over time
 A dollar tomorrow is worth less than a dollar today
 A dollar yesterday should have grown to be more
than a dollar today
 Future cash flows are not certain

21. Timing Issues and Lost Profits
 Damage Period
 What is the appropriate period over which the lost
profits should be calculated?
 Past lost profits were lost prior to trial
 Future lost profits are expected after the trial
 Making the injured party whole is therefore
complicated by timing issues

22. Timing Issues Terminology
 Ex Ante Calculation
 Damages are calculated as of the date of the breach
 Expected future damages are based on what was
known or reasonably knowable as of the date of the
bad act
 Damages are discounted to the date of the bad act

23. Timing Issues Terminology
 Ex Post Damages
 Damages calculated as of a date after the breach
(typically an assumed trial date)
 Damages that occurred between date of breach and
trial informed by intervening events
 Post trial damages discounted to trial date
 Pretrial damages brought forward at prejudgment
interest or some other rate

24. CONTACT
US
D.
Michael
Costello,
CPA•ABV•CFF,
ASA,
CFE
Principal
mikecostello@decosimo.com
www.linkedin.com/in/mikecostello
Sharon
P.
Hamrick,
CPA•CFF,
CFE
Senior
Manager,
Decosimo
Advisory
Services
sharonhamrick@decosimo.com
www.linkedin.com/in/sharonhamrick
423-­‐756-­‐7100
The
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