Chapter 11-6 Lost Profit

• Jurisdiction: United States

11-6 Lost Profit

11-6:1 When to Use a Lost Profits Damage Model

Generally, either the value of the business enterprise as a whole is being valued, or the stream of lost profits is being valued, but not both. Since a major factor in the valuation of a business enterprise is the valuation of the stream of income it is expected to generate, seeking recovery both for diminished value of the business and for lost profits would typically constitute double counting.¹²⁸ However, occasionally a damages expert will correctly build both computations into the damages model. For example, the expert may compute the value of a stream of lost profits for a defined period and then compute the reduction in the value of the business enterprise at the end of that defined period.¹²⁹

A lost profits measure of damages is commonly utilized in breach of contract cases¹³⁰ and in tort cases, other than those cases in which an existing business is completely destroyed (in which event a loss of business value calculation may be required).¹³¹

A lost profits damage model is appropriate if there is enough data from which to determine the likely net profit (not just lost income¹³²) that would have been received by the plaintiff but for the wrongful conduct of the defendant. Recovery for lost profits does not require that the loss be susceptible to exact calculation, but the injured party must do more than show that it suffered some lost profits.¹³³ Lost profits must be shown by competent evidence with reasonable certainty, based on objective facts, figures or data from which the lost profits amount may be ascertained,¹³⁴ with a complete calculation.¹³⁵

"Where the business is shown to have been already established and making a profit at the time when the contract was breached or the tort committed, such pre-existing profit, together with other facts and circumstances, may indicate with reasonable certainty the amount of profits lost."¹³⁶

Unlike other jurisdictions, Texas permits a recovery for lost profits even by new businesses. However, where no such track record of profit exists (which invariably is the case with a new business), other methods exist for demonstrating lost profits with reasonable certainty, such as focusing on specific business activities with a proven track record rather than on the profits of the new business as a whole,¹³⁷ producing future contracts to show objectively that the opportunity for future revenue existed,¹³⁸ or measuring the opportunities of the new business by comparison to another established business also owned and operated by the plaintiff.¹³⁹ However, when a lost profits calculation depends on speculative future assumptions, lost profits are not recov-erable.¹⁴⁰ "The mere hope for success of an untried enterprise, even when that hope is realistic, is not enough for recovery of lost profits. When there are firmer reasons to expect a business to yield a profit, the enterprise is not prohibited from recovering merely because it is new."¹⁴¹

11-6:2 Using a Discount Rate in a Lost Profits Calculation

There are multiple methods for proving lost profits¹⁴² and not all lost profit calculations involve the use of a discount rate, nor do all lost profit calculations require expert testimony.¹⁴³ However, discount rates are commonly used for two purposes: to account for risk by discounting the certainty of future profits,¹⁴⁴ and to account for the time value of money by discounting future profits to...