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What Constitutes Best Evidence to Support Claims of Economic Damages? by Scott Bouchner, CMA, CVA, CFE, CIRA

Posted on June 11, 2018 by Scott Bouchner

Attorneys involved in economic damages cases understand that they have an obligation to prove lost profits with “reasonable certainty” based on their use of “best evidence.” However, the courts have not agreed on one universally accepted standard or criteria for what specifically constitutes best evidence; such decisions inevitably rely on the facts and circumstances of each individual case. Therefore, two courts faced with similar issues may reach entirely different opinions when deciding whether a plaintiff has supported its damage claim using the best evidence.

In Eastern Fireproofing Co. v. United States Gypsum Co., No. 57-938-G (US District Court Mass., 1970), the court stated:

“a plaintiff may not conjure up favorable estimations and hold back more solid but less favorable evidence otherwise available. And the admissibility of a particular class of evidence will depend to a degree upon the availability of less speculative evidence. On the other hand, there is no rule of law that only the best available evidence may be used. This would necessarily imply a determination of what class of evidence is best and it seems that such a determination cannot be made without infringing on the proper function of the jury as the finder of fact.”

With this in mind, attorneys have an opportunity to strengthen damages cases when they focus on reliable facts and sound methodology that other experts have attempted to use to meet or fail to meet the reasonable certainty standard. Following are just some of the factors that attorneys should consider when proving or disproving economic damages.

Use of Plaintiffs / Defendants Historical Financial Data

Supporting claims for economic damages in a commercial dispute typical starts with an historical review of a plaintiff and/or defendant’s financial data that preceded the alleged bad act of the other party. This assessment can include historical revenue, costs and profits/losses in the years leading up to a point in time and compare it to the same facts that occurred during and after the alleged damages period. Yet, experts should also consider whether or not there are factors other than the defendant’s alleged bad acts that could have caused a change in the injured party’s financial results. This may include changes in the economy, competition, technology, governmental regulation, the introduction of alternative products, etc.

Use of Contemporaneous Third-Party Market Data

The availability of contemporaneous, third-party market data can potentially help a plaintiff’s expert establish claims for damages. Conversely, defendants’ experts have been successful using contradictory data to demonstrate flaws in the plaintiffs’ analyses. Therefore, expert witnesses should tread carefully and consider the credibility and relevance of the data they use as a foundation for their testimony and make efforts to consider how other information could potentially lead to different conclusions. Moreover, they should be prepared to explain how they weighed alternative sources of data and the reasons why one set of data was preferable or more reliable than an other.

Use of Plaintiffs Other Businesses

When a plaintiff’s business does not have a sufficient track record to establish evidence of profitable operations, its historical financial data may not be an appropriate basis for estimating future profitability. Under these circumstances, some courts have accepted the historical data of a plaintiff’s other businesses as a benchmark or yardstick to establish economic damages.

However, the plaintiff ultimately bears the responsibility to demonstrate sufficient comparability between the subject business and the other benchmark businesses and make adjustments to account for differences to the extent applicable.

Reliance on Specific Customer Sales Data

Ideally, the identification of specific lost sales caused by the defendant’s bad acts helps to substantiate a claim for lost profits and can be very persuasive to a jury. With this in mind, it is generally a useful exercise to review historical sales patterns, analyze communications with customers and attempt to demonstrate sales that a plaintiff would have made but for the defendant’s actions. From a practical standpoint, however, it is rare that the plaintiff can identify the name of the customer, along with the date, amount of the would-be sale and the reasons for the loss. When it is not possible to identify these specific lost sales, some plaintiffs have been able to overcome this lack of direct information by analyzing changes in customer behavior and sales patterns, and demonstrating their connection to the specific allegations.

Use of Contemporaneous Pre-Litigation Projections and Transactions

The court’s decision in Reese Schonfeld vs. Russ Hilliard, Les Hilliard and International News Network, Inc., 218 F.3d 164; 2000 U.S. App. LEXIS 15684 is frequently cited in economic damages cases to demonstrate that a plaintiff’s contemporaneous, arm’s-length transactions involving investments in or the sale of ownership interests in the subject company may provide more reliable evidence of damages than lost profit calculations, especially when the lack of a track record would require the development of potentially “speculative assumptions.”

Similarly, the courts have often found that financial projections prepared by one or both parties prior to any litigation to be more persuasive than those prepared solely for, or in response to, litigation.

With this in mind, attorneys should be prepared to share with their experts their clients’ accounting and operational data, budgets, financial forecasts and projections, pre-trial business and marketing plans, sales and pricing agreements, memorandums of understanding and other transactional contracts, all of which may be useful to identify and substantiate assumptions used to quantify damages.

Use of Multiple Regression Analysis / Statistical Analyses

Multiple regression analysis, sampling methodologies and other statistical analyses have become increasingly common and accepted methods used to establish reasonable certainty in damages calculations. However, the effectiveness of such statistical approaches are dependent on an expert’s understanding of how to conduct them properly, based on verifiable facts, to avoid common errors that could invalidate the results.

Plaintiffs, along with their counsel and retained experts, should work collaboratively to identify the best evidence available to establish with reasonable certainty a defensible claim for economic damages.  In determining what constitutes best evidence, it generally is advisable that the parties identify other information that may be contrary to the data they relied upon and that they be prepared to explain how they considered this additional information in the preparation of the damages claim.


About the Author: Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with Berkowitz Pollack Brant’s Forensic Accounting and Business Valuation Services practice, where he serves as a litigation consultant, expert witness, court-appointed expert and forensic investigator on a number of high-profile cases. He can be reached at the CPA firm’s Miami office as (305) 379-7000 or via email at


Best Practices for Businesses after a Disaster By Daniel Hughes, CPA/CFF/CGMA

Posted on August 14, 2017 by Daniel Hughes

As we deal with peak hurricane season, we are reminded once again of the importance of preparing for and responding to natural disasters in order to minimize losses and ensure long-term viability.  The actions a business takes during the first few days following a loss can often determine the success of its recovery and settlement of insurance claims for property damages and lost profits.

Following are seven tasks that well-prepared businesses incorporate in their continuity plans. If such a plan does not already exist, a business should still consider adopting these best practices to make the recovery process smoother and improve their chances of a complete and satisfactory recovery.

Step 1: Assess Damages.  As soon as the danger has passed, business owners should conduct the following activities:

·        Identify the cause and origin of the loss

·        Assess structural components of the remaining facilities

·        Determine the scope of physical damage

·        Reach a consensus with an insurance representative on the scope of the damages

·        Conduct a count of damaged and/or destroyed inventory

It is recommend that business owners record the damages they incurred via videotape as soon as possible after incurring a loss.  A narrated video provides an inexpensive ounce of prevention if there are future disputes with insurers about specific damage.

Step 2: Protect and Secure the Site. Boarding up broken windows, making temporary roof repairs, covering machinery to protect against the elements and disconnecting utility services are examples of activities businesses should engage in to protect their property from further damage. In addition, consideration should be given to securing the damaged area with temporary fencing or security personnel to ensure it remains intact for subsequent investigation and calculation of losses.   Retail establishments should take extra care to avoid looting.  Securing the site and protecting property is typically an insurance policy requirement.  Plus, it will help to expedite the business’s return to its normal operations.

Step 3: Form a Recovery Task Force. Business owners looking to get their operations up and running quickly must act fast to reestablish revenue streams from customers. The best way to accomplish this is to have a solid recovery plan carried out by a company task force made up the following key constituents:

  • Employees representing the business’s damaged operations, such as an operations manager, head of manufacturing, etc.
  • Personnel responsible for rebuilding, such as a facilities manager, project manager, etc.
  • A representative with the construction contractor
  • A risk manager or other staff member in charge of corporate insurance policies
  • Key staff members who interact regularly with customers, such as sales directors or customer relations representatives
  • A corporate finance or accounting liaison, who will serve as the gatekeeper to gather, track, and record the repair costs as well as distribute the necessary information to other appropriate parties
  • Other consultants retained to assist in the recovery, including engineers, reconstruction experts and outside accountants and consultants

Step 4: Be Involved in Estimations of Losses. When an insured business has a covered loss, the insurance carrier will typically send out one of its adjuster to establish a “reserve”, which is an initial estimate of the loss.  Rather than leaving this initial loss estimation solely in the hands of insurance adjusters or other outside consultants, business owners should involve themselves in the process. No one knows a business better than its owner(s), who have unique knowledge about the business’s operations and facilities as well as the cost of replacement equipment, building materials or temporary locations. Moreover, a business interruption estimate prepared in cooperation with a business owner is less likely to overlook important factors that might affect the ultimate amount of covered losses, such as recently awarded contracts, new customers, new products, recently implemented or soon to be implemented cost savings or efficiencies, which may affect the ultimate amount of the loss.


Step 5: Establish a Loss Accounting System. There are many ways for businesses to account for a loss, but the best method is to use a simple system that follows their normal day-to-day activities.  Examples can include creating a set of charge codes related to the loss, establishing separate costs centers for each repair expense category or creating a project work order, as if the repair was a normal project. The goals should be to separate repair costs from normal operating expenses and keep them organized and easy to access.


Step 6: Run Expenses and Invoices through a Corporate Gatekeeper. Invoices for loss-related expenses should be routed to an individual in the business’s accounting department (e.g.; controller, chief accountant, etc.), who can review them for accuracy, appropriate detail and relevance to a claimed loss. The job of the Gatekeeper is to ensure that all invoices meet an insurance company’s reimbursement requirements before a business pays an invoice.   If further detail is required from the vendor, it is often much easier to get the information before the invoice is paid rather than after.


Step 7: Get Help. The recovery from a loss is a traumatic and potentially significant event.  For some companies, major losses threaten their very existence and a full recovery determines survival or extinction.  Getting help from a professional accountant, lawyer and/or engineer who specialize in financial recovery from losses and keeps your best interests in mind can make the process less complicated. They will work with your company, insurance broker and the insurer’s representatives in the time consuming task of preparing complete and fully documented claims, allowing your personnel to concentrate on the task of serving customers, repairing facilities and returning to normal operations. In addition, their fees may be covered by an insurance policy with a “professional fee” or “claim preparation cost” endorsement.


The Forensic Accounting and Business Insurance Claims practices of Berkowitz Pollack Brant has more than three decades of experience helping Florida businesses prepare for and maximize financial recovery from insured perils.


About the Author: Daniel S. Hughes, CPA/CFF, CGMA, CVA, is a director in the Forensics and Business Valuation Services practice at Berkowitz Pollack Brant, where he works with businesses of all sizes on matters involving valuations, economic damages, lost profits and the quantification of business interruption insurance claims.  He can be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at



Reasonable Compensation and Its Effect on the Value of a Business by Scott Bouchner, CMA, CVA, CFE, CIRA, and Sharon F. Foote, ASA, CFE

Posted on June 20, 2017 by Scott Bouchner

Over the next two decades, millions of business owners will sell or transfer several trillion dollars’ worth of privately held business assets. Proper valuations of these entities using an asset approach, an income approach and/or a market approach will provide worthwhile information to both buyers and sellers. However, when using the income or market approaches to valuations, it is important to first normalize a business’ financial statements in order to estimate future expected cash flow that a potential buyer can reasonably expect to receive in return for his or her investment.

The International Glossary of Business Valuation Terms defines normalized financial statements as those “adjusted for non-operating assets and liabilities and/or for nonrecurring, noneconomic, or other unusual items to eliminate anomalies and/or facilitate comparison”. Such a normalization process requires a business’s valuation to present information on a basis similar to that of other companies in its peer group and in benchmark studies used for comparison and analysis. One of the most common normalization adjustments utilized in valuing closely held companies is officers’ and owners’ compensation.

The purpose of making a compensation adjustment is to remove any distortion of the company’s operating performance caused by compensation and/or perquisites paid to its management team. To reflect a realistic or reasonable value, the valuation professional “normalizes” the company’s cash flows to reflect what buyers can potentially expect to be available to them.

However, the U.S. Tax Court has been examining officers’ and owners’ compensation for decades because the compensation structure of smaller, privately held companies are often less structured and more flexible than that of larger and publicly traded companies. Owners may pay themselves or those related to them higher or lower salaries, or they may provide other forms of incentives and noncash compensation in order to reduce tax liabilities, improve cash flow or business value, or simply to retain cash.

For example, business owners may reallocate income and essentially misrepresent business value when they do any of the following (as well as other actions not mentioned here):

  1. Move income to a close family member who is in a lower tax bracket or who does not actually do any significant work for the company;
  2. Book deferred compensation;
  3. Receive income in another form, such as rent for company facilities held in a separate entity; or
  4. Book loans to the company, which could be considered compensation.

In the context of performing a valuation engagement, owners’ or officers’ compensation must be normalized to reflect the salary and benefits an outside third-party would be paid to fill the same position. To arrive at a normalized compensation figure, valuation analysts would commonly examine the following:

  • The skill set, education, qualifications and experience of the employee;
  • The employee’s duties, the nature, the scope and the time required to do them;
  • The complexity, size and geographic areas serviced by the business’ operations;
  • The condition of the economy and industry the business services; and
  • The salaries, bonuses, benefits and/or other perquisites paid to employees doing comparable jobs in similar businesses in the same geographic region.

To determine if perquisites are at a normal level (for an outside employee), business analysts must evaluate specific items, such as (1) automobile expense allowance, (2) tuition reimbursement, (3) country club and other membership fees, and (4) insurance (health, life, or other types) and retirement benefits. If excessive, these types of expenses would need to be normalized as well.  Analysts must also consider the cost to replace the current owner or officer. Locating a replacement employee could require a long and potentially expensive search as well as a costly signing bonus and/or placement agency fee.

To benchmark what a reasonable range for total compensation may be, valuators will often turn to trade associations, specialty consulting firms or other industry groups that often make this type of data readily available.  Among the more popular resources are the Bureau of Labor Statistics and the RMA Annual Statement Studies. Data can also be found on the Internet, at websites such as, or in the SEC filings of publicly traded companies that may be used as reasonable comparison for the company being valued.

Compensation adjustments can have a significant impact on the value of a business, especially if the business’s value is calculated under an income or market approach using revenues and/or earnings. For that reason, normalization adjustments, such as owners’ and officers’ compensation, must be carefully considered.

About the Authors: Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with Berkowitz Pollack Brant’s Forensic Accounting and Business Valuation Services practice, where he has served as a litigation consultant, expert witness, court-appointed expert and forensic investigator on a number of high-profile cases. Sharon F. Foote, ASA, CFE, is a manager in the Forensics and Business Valuation practice. For more information, call (305) 379-7000or email

Lost Business Value or Lost Profits – What is the Difference? by Sharon F. Foote, ASA, CFE

Posted on December 02, 2016 by Scott Bouchner

Financial experts are often utilized by attorneys in commercial litigation cases. The goal is to make the injured party whole; in other words, to return the plaintiff to the financial condition the business would have been in but for the alleged acts of the defendant.   Economic damage claims can be calculated by analyzing the affected business from two different perspectives – lost profits or lost business value, depending on the facts and circumstances of each case.  The decision of which approach is appropriate should be decided by the damages expert and counsel early in the case, being aware that a business cannot typically recover both lost business value and lost profits.

The amount of damages under both approaches could be similar if all else is held constant. However, in reality, the damages may be significantly different due to the inherent differences in both approaches, which are discussed below.

On June 6, 2014, the Florida Supreme Court approved jury instructions for contract and business litigation that concisely presents the concepts of contract damages. Instruction 504.3, Lost Profits, explains that to recover lost profits, a claimant must prove the defendant caused the claimant’s lost profits and the amount of lost profits must be established “with reasonable certainty.” Instruction 504.4, Damages for Complete Destruction of Business, is only given in the case of a “complete destruction” of the claimant’s business. The jury is instructed that the claimant’s damages are based on the market value of the business; anything less than “complete destruction” would be compensated via the “lost profits” instruction. (Source: In re Standard Jury Instructions – Contract and Business Cases, Instruction 504.3-504.4, 116 So. 3d 284 (Fla. 2013)).

In many valuations (under the fair market value standard), the parties are the hypothetical willing buyer and willing seller as discussed in IRS Revenue Ruling 59-60; in lost profits analyses, the parties are not considered to be either hypothetical or willing. Another of the differences between a compliance-related valuation (i.e., those for tax and financial reporting purposes) and a valuation related to economic damages is that the business value in a compliance-related valuation is as of one specific date in time, whereas in a damage claim for diminution in business value, the value of the business is determined both before and after the causative act as of the dates decided by the court.

In a loss of business value calculation, only the facts known or knowable as of the valuation date are generally considered. The courts in some cases have allowed hindsight, even where there has been a loss of business value, such as when, if hindsight were not allowed, it would result in either a windfall gain or an unfair penalization of the plaintiff.

An early case, frequently cited even today, allowed hindsight and is referred to as the “Book of Wisdom” based on a 1933 U.S. Supreme Court decision in the case of Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 US 689 (1933). The decision in this case advocated the use of actual results to determine what the value of a patent should have been on the valuation date by proving the “elements of value that were there from the beginning”.  The decision in Sinclair Refining effectively allowed for a valuation based on actual results after the valuation date that would supplant market value (based on forecasted data) estimated as of the valuation date since that assessment failed to accurately determine value for the undeveloped patent.

However, in a lost profits calculation, facts and events occurring after the alleged harmful actions of the defendant are considered. If the business lost earnings for a finite period of time, damages can be determined by using a lost profits approach and then adjusted for any mitigation of those damages by the plaintiff.

In the analysis of lost business value under an income approach, the discount rate utilized would typically be either the injured entity’s equity rate of return or its weighted average cost of capital (WACC), calculated using either a build-up method or the capital asset pricing model (CAPM). However, the discount rate utilized in a lost profits calculation could be one of those or others such as the plaintiff’s cost of debt, or its internal rate of return. Another option allowed by some courts is that the projected cash flows can be adjusted to account for the risk associated with them and a risk-free (or risk reduced) rate can be used.

Lost business value calculations consider all costs needed to generate the entity’s revenues and profits as compared to lost profits analyses, which typically place greater emphasis on costs associated with the lost revenues.

As is evident from the discussion above, the calculation of damages under either the lost profits approach or the loss of business value approach is complex and dependent on the facts and circumstances unique to each case, making it very important to utilize experienced, credentialed damage experts that will provide optimum assistance to counsel.

About the Author: Sharon Foote, ASA, CFE, is a member of Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice. She can be reached in the firm’s Miami office at 305-379-7000 or by email at

How to Build Business Value Before a Sale or Merger by Richard A. Pollack, CPA

Posted on August 18, 2016 by Richard Pollack

Business owners may erroneously assume that the value of their companies is the same as their profits, which is calculated by subtracting expenses from total revenue. While profits certainly play a role in establishing how much an enterprise is worth, it is not the sole determinant. Other factors come into play that may enhance or dilute a business’s value, or the estimated monetary amount that a willing buyer will pay a willing seller to assume ownership of the business and all the benefits, risks and liabilities that transfer with such ownership.


A business’s value is related to the use of its financial and nonfinancial resources, as well as other non-monetary elements influencing the entity’s health and well-being in the long-term. While value may be maximized when profits are at their peak, other subjective and intangible factors play an important role in enhancing or diminishing value.


Controllable Factors

Building business value is a long-term, ongoing philosophy that business owners should adopt, preferably at inception, in order to optimize value throughout their business’s lifecycle, in both good times and bad. Selling a business at “the most opportune time” is not always possible. Therefore, business owners should have a firm understanding of the following factors typically considered in determining the value of a business:


  • The nature and history of the business since its inception;
  • The book value of the stock and the business’s financial position;
  • The company’s earning capacity;
  • Determination of whether the enterprise has goodwill or other intangible value;
  • Sales of the company stock and size of the block to be valued;
  • The economic outlook in general, and the condition and outlook of the company’s specific industry; and
  • The market price of stocks of corporations engaged in the same or similar line of business currently having their stock actively traded in a free and open market, either on an exchange or over the counter.


The last two determinants of value are out of the business owner’s control. However, the owner has the ability to focus on improving the first five factors while remembering that those improvements must be made within the context of the uncontrollable elements. This can include managing the following:


  • The company’s profit margin;
  • The company’s growth and outlook;
  • The quality of the business’s earnings stream (including concentration of customers or suppliers);
  • The business’s ability to continue past earnings performance into the future;
  • The quality of the company’s balance sheet (liquidity); and
  • The capabilities of the entity’s management team, including key management characteristics and succession plans.


In general, the valuation methodologies applied to a closely held business are a function of the specific risks applicable to its earnings stream and its capital structure. Value is increased by minimizing risks, increasing growth opportunities and managing financial leverage.  Common methodologies for determining value include the income approach, the market approach and the asset approach.


The Income Approach. A business’s value is based on the expected future benefits to the owner or owners, based on historical results or management’s income statement projections, which are discounted back to the present using a discount rate that reflects the time value of money and the risk associated with procuring these benefits. These future benefits are usually identified in terms of cash flow or earnings.  The discount rate is customarily measured by means of the build-up method or the Capital Asset Pricing Model (CAPM), both of which are based on a risk-free rate (using a rate from U.S. Treasury securities as a proxy), various levels of market risk, and the specific risks of the business being valued.


The Market Approach. Businesses employing the market approach mainly focus on their income statements. They base the value of a business on comparisons to purchase and sale transactions for companies in the same or similar industry and/or by comparing the company to either publicly-traded companies in the same or similar industry and applying a multiple of revenues and/or earnings to the subject company’s revenues and/or earnings.


The Asset Approach. The asset approach to business valuations focuses on the balance sheet. The value of the subject business will be based on the current value of its individual assets, both tangible and intangible, less the current of its liabilities. This approach is typically employed as the basis for valuing an asset-holding company, such as those owning real property and/or marketable securities.


Build Value, Build the Future

Adopting strategies to manage controllable risks, be aware of uncontrollable risks, and assess opportunities will help business owners establish and maintain a strong foundation on which they can build value for an eventual sale or merger of their businesses.


About the Author: Richard A. Pollack, CPA/ABV/CFF/PFS, ASA, CBA, CFE, CAMS, CIRA, CVA, is director-in-charge of the Forensic and Business Valuation Services practice with Berkowitz Pollack Brant, where he has served as a litigation consultant, expert witness, court-appointed expert, forensic accountant and forensic investigator on a number of high-profile cases. He can be reached in the CPA firm’s Miami office at 305-379-7000 or via email at


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