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How Business Valuation Measures Economic Damages

By September 13, 2022June 17th, 2024Blog3 min read
Business Valuation Services

Economic damages claims are made when there is a breach of contract. It may be employment contracts, sale of business or goods contracts, insurance contracts, or non-compete clauses. Under this claim, the party sustains economic damages because of a breach. With regard to damages, the party is to be put in the same position as if the contract had been completed under the claim.

When such a claim is brought up by a plaintiff, economic damages have to be evaluated. Let us look at how this process is carried out.

What are Economic Damages?

Economic damages often take the form of lost profits when it comes to businesses, it is calculated as the revenue the plaintiff would have made if not for the breach of contract or wrongful action, minus the costs saved.

The economic difference between the events leading to the litigation and what should have happened are quantified.

A valuation is done by analyzing various documents regarding company valuation, conducting interviews with the plaintiff and others, taking into account factors like economic environment and competition, etc. This information and input from other experts are considered to develop a sound economic model of damages.

This is how lost profits and diminished business value are quantified by experts. This will give an idea of how the plaintiff can be reimbursed.

How are Economic Damages Measured?

A couple of methods are followed to get a proper value of economic damages. The expert decides the proper method to determine the economic damages according to certain specific circumstances. Some of the methods are

Sales Projection or “But For” or Market Method: This method utilizes sales forecasts and projections to estimate the company’s expected cash flow as the basis for damages. This method is applied when the company in question is relatively new with limited meaningful comparables and operating history. It is often applied to start-ups and one-of-a-kind companies.

Before-And-After Method: The economic damage is calculated by finding the difference between the company’s expected performance if the breach or tort had not taken place and the actual performance.

Yardstick or Comparable Method: This method considers the company valuation of a similar competitor, publicly traded comparables, or industry guidelines as a yardstick. It assumes the company would have performed as well as a competitor if not for the act of tort.

These methods are employed according to the circumstances, after which experts can estimate the lost profits.

Also Read, Top 8 Situations Where Business Valuation is Needed

Trust the Valuation Experts

Calculating the economic damages in litigation is not easy. It takes care and the expertise of a firm that has handled such cases previously. The success of such a case depends on the approach taken, factors taken into consideration, and the assumptions’ strength. The risks involved in such a scenario call for the help of experts in the field.

At RNC, we are a trusted name with more than 30 years of experience. We specialize in economic damages, business valuation, intangible assets, goodwill valuation, distressed M&A deals, insurance advisory, asset tagging, due diligence, corporate finance, insurance, advisory services, and other valuation. Reach out to us for any assistance with your business valuation needs.