Chapter 11-7 Loss of Value of a Business

• Jurisdiction: United States

11-7 Loss of Value of a Business

11-7:1 When to Use a Loss of Business Value Damage Model

While a lost profits calculation is generally simpler than a loss of value of business calculation, the latter may be appropriate because an existing business has been destroyed in its entirety by wrongful conduct,¹⁵² or because a lost profits calculation alone does not capture the totality of harm.¹⁵³ Damages in a breach of contract case will more commonly be measured by lost profits rather than a loss of value of business calculation, unless loss of business value constitutes an out-of-pocket reliance cost that was contemplated or anticipated by the parties.¹⁵⁴

Obviously anticipated future profits are crucially important in valuing a business, but other things such as the cost of the assets of a business can be part of a business valuation as well. Since the valuation of future profits is already considered in the valuation of a business (subject to the same requirement as for lost profits that the future profits not be remote or speculative¹⁵⁵), the recovery of both lost profits and lost business value for the same time period would constitute a double recovery.¹⁵⁶ Conversely, two different measures of damages can be used to assess damages for two different time periods.¹⁵⁷

Although the requirement of "reasonable certainty" for lost profits exists when the lost profits are not sought as damages themselves but are used to determine the lost market value of property for which recovery is sought, "the law should not require greater certainty in projecting those profits than the market itself would."¹⁵⁸ this means that if the market places a positive value on what might otherwise be considered a speculative opportunity, that positive value may be considered in determining the market value of the business property that owns the opportunity.¹⁵⁹

Rather than valuing lost profits over a range of time, a "loss of value of business" is calculated as of a specific point in time, or more likely two points in time (before and after an event).¹⁶⁰ Pick the valuation date carefully.¹⁶¹

11-7:2 Common Loss of Business Value Damage Models

As with valuation of real property, since business valuation is seeking to determine market value, most business valuation analysis is based on one or a combination of three market value models: the income approach, the asset-based cost approach, or the market approach.¹⁶² Subject to the court's legal determination as to what constitutes a proper measure of damages,¹⁶³ when different experts present different valuation methods to the court or jury, the fact finder is not bound by any one specific approach.¹⁶⁴ these are some of the most common measures of damages for determining the loss of value of a business:

Book Value of Investment [asset-based cost approach]: "Book value" was once the dominant method of valuing a business. Before computers, the most readily available information came from the accountants for a business, and accountants tracked the assets and liabilities of a business in their "books," with the difference between assets and liabilities reflecting the "net worth" or "equity" in the business. Since this book value number was available, it was commonly used in litigation. Book value often does not truly answer the question of business market value, however, because book value is based on historical cost, not necessarily reflective of current market value, and because the value of the whole is often greater than the sum of the component parts due to the earning power associated with the business operating as a going concern.¹⁶⁵
Multiple of Book Value [hybrid market and asset-based cost approach]: In some industries, it is common for businesses to be valued and sold on a "multiple of book." A multiple of book is the multiplier commonly used for sales of businesses in that industry (such as in banking), but the usefulness of this approach depends upon whether it is historically utilized in the particular industry. the multiple is typically derived through comparable sales from the industry, after "normalization" of the balance sheet (to more accurately restate historical num-bers).¹⁶⁶
Multiple of Earnings [hybrid market and income

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