Demonstrating damages for lost income of a new business
presents significant challenges.
JOE EPPS, CPA/CFF/ABV, CFE, CVA, PRESIDENT
EPPS FORENSIC CONSULTING PLLC
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Lost Income Damages and
This is not to say that such damages
can never be proven to a reasonable
degree of probability. As with any
expert opinion, proving damages is
all about laying a sound foundation.
However, when there is no signifi-cant historical data for the business,
the foundation becomes both more
difficult to develop and more critical
to the opinions.
Foundation for Opinion
In some cases, the foundation is
simply insufficient to allow for a
demonstration that lost income
damages would be anything other
than speculation. Whether you represent the Plaintiff or the Defendant, your lost income expert must
be able to present the foundation
for their opinions. That foundation
should take into consideration the
issues presented in this article and
others which cannot be addressed
in an article of this length.
Two Types of New Business
In the first, the business never began
operations before the event giving
rise to the litigation (the “triggering
event”). In the second situation, the
business did begin to operate, but
the time of operations before the
triggering event was very limited.
Key Foundational Factors to
Demonstrate a Business Start
In the situation where the business
had not begun operations, there
must first be a demonstration that
the business really would have begun to operate but for the event at
issue in the case.
This would include such factors as
licensing, acquisition of space, and
identification of key personnel.
There must also be a solid basis for
demonstration of when the business would have begun to operate.
Other foundational issues include
ownership, key personnel, key vendors, capitalization and planning.
There should be a demonstration
of who the owners are, their respective ownership interest and a demonstration of what role each owner
will play in the business. It is also
important to demonstrate that the
owners can work effectively together.
All businesses rely on key personnel who usually must be on board
prior to the business opening.
For example, key technical people
should be identified well before the
business actually begins operations.
Key vendors include manufacturers, distributors and wholesalers. If
the business has started operating,
the key vendors should be in place
and the relationships with them
should be documented. If the business has not started operations, the
more important it is that key vendors the closer to the start of operations have been contacted and if
appropriate, contracts put in place.
Capitalization refers to the process
of arranging for the money necessary to begin and sustain opera-tions. The expert should confirm the
capacity of the owners to raise the
necessary capital, or that they had
the capacity to do so.
Other Foundational Issues
There are certainly additional issues
to develop a foundation for, including sales, cost of sales and expense
projections. However, if the expert
has not demonstrated that the business existed or would have existed
by the triggering date, the projections could be irrelevant.