In commercial litigation, proving damages can be as important as establishing the facts necessary to win a judgment. A court won’t grant a party unproven damages, nor will a defendant be willing to enter into a settlement calling for payments that the plaintiff hasn’t justified. Forensic accountants work with clients to develop a sound evidentiary basis for litigators to use to establish a business’s losses.
A business’s past performance often provides essential data, especially if the litigation seeks recovery for business interruption or lost future earnings. But new businesses usually lack the rich historical record that forensic accountants and litigators rely upon. The absence of a long paper trail means damages need to be calculated using alternative methods. The key is that the process satisfies legal standards to be reliable in court.
To recover lost profits in litigation, a business must be able to prove them with reasonable certainty. The evidence required to satisfy the “reasonable certainty” test varies from case to case, depending on a set of flexible factors. Among these factors is the reliability of the data underlying the plaintiff’s damages calculation. For a relatively new business, reliability can be tricky. How certain was the business’s profitability when the losses were caused? How would the business’s status as a newcomer affect its future earnings? What common problems facing new businesses, like staffing challenges or limited financing options, could influence its potential?
To answer questions like these, forensic accountants and litigators examine the business from every angle. A sound evidentiary basis can establish damages with reasonable certainty using a broad basket of facts, including these:
- The track record of key management personnel.
What credentials do top managers bring to the business? Have they run successful businesses before? Are they contributing valuable know-how to the business’s operations or products?
- The business’s financial models and projections.
Courts typically look favorably upon a company’s own analysis of its financial condition, on grounds that the company has a significant incentive to get it right. Such projections naturally are subject to scrutiny. Management might have prepared them without using rigorous standards. Or they might have been prepared with a bias toward unrealistic earnings growth, perhaps in anticipation of litigation or ahead of a major transaction, such as an IPO or merger.
- Trends within the business’s industry and market.
The performance of other businesses in the plaintiff’s industry can be a meaningful measuring stick for how the business might have been expected to perform. This analysis might look at national trends, or it may focus more narrowly on local conditions, depending on what is most relevant to the plaintiff’s operations.
- The certainty of lost prospects.
Proving the loss of new opportunities can be especially challenging for new businesses. If the plaintiff was negotiating a potentially lucrative contract when the defendant’s wrongful actions intervened, the plaintiff will want to include the value of the contract in its damages. Before a court will allow damages for contingent factors like future closings, their likelihood of success must be proven by more than just the management’s conjecture. Evidence about the advanced state of negotiations, examples of current performance, and testimony by counterparties may all help.
New businesses that want to recover damages for lost earnings will need the help of experienced professionals to make their strongest case. HSNO’s forensic accounting team routinely supports clients with their damages calculations. Our systematic approach involves developing close working relationships with clients and their attorneys. We take into consideration the full scope of a client’s business needs and litigation strategy.
To learn how HSNO may be able to help your business, please contact us today.