Two measures, one injury

Commercial damages claims typically seek to place the injured party in the economic position it would have occupied but for the wrongful conduct. Two measures dominate: lost profits, the stream of net income the claimant would have earned over a defined period, and lost business value, the diminution in the fair market value of the enterprise, or its destruction outright. Both rest on the same but-for framework, but they answer different questions and are supported by different evidence.

Lost profits is a flow measure. It compares projected but-for profits with actual profits over the period of harm and discounts the difference to present value. Lost business value is a stock measure. It compares the value of the business immediately before the harm with its value immediately after, or, where the business was destroyed, with zero, and typically employs valuation methods such as discounted cash flow, capitalization of earnings, or market multiples.

When each measure applies

The nature and duration of the injury drive the selection. Where the harm is temporary and the business continues, lost profits is ordinarily the appropriate measure: a supply interruption, a breached distribution agreement, or a period of diverted customers produces a bounded stream of foregone income after which operations return to their but-for trajectory. Where the harm is permanent, where the business ceased to operate, lost a defining asset, or was reduced to a materially different enterprise, lost business value captures the injury more completely, because the foregone earnings extend indefinitely and are best expressed as the value of the earnings capacity itself.

Hybrid situations arise. A business may suffer a period of lost profits and then be sold at a depressed value. The analyst must take care that the two measures address distinct periods and distinct harms; presenting lost profits through a date and lost value as of that same date, without reconciliation, invites the objection that the same future cash flows have been counted twice. A coherent damages model states explicitly which cash flows fall within each measure and demonstrates that the boundaries do not overlap.

Reasonable certainty and the but-for projection

Courts generally require that lost profits be proven with reasonable certainty as to their existence, while permitting a more approximate showing as to amount. In practice this places a premium on the but-for projection. Three families of method are widely accepted:

  • Before-and-after. Historical performance before the harm establishes the baseline; performance during the harm period is compared against it, adjusted for market and seasonal factors. It is most persuasive where the claimant has a stable operating history.
  • Yardstick. Comparable businesses, locations, or product lines unaffected by the harm serve as a benchmark. Its reliability depends on demonstrating genuine comparability and isolating the effect of the wrongful conduct from other differences.
  • Projection-based. Budgets, forecasts, contracts, and industry data support a modeled but-for result. This is often the only option for newer businesses, and it is the method most exposed to challenge on speculation grounds.

Whatever the method, the projection must be reconciled to the record. Management forecasts prepared before the dispute carry more weight than forecasts prepared for litigation. Incremental costs that would have been incurred to earn the lost revenue must be deducted, and the treatment of fixed costs must be explained rather than assumed. Mitigation, causation, and the period of loss are questions on which counsel and the expert should align early, because they shape the data request.

Discounting, interest, and the measurement date

Lost profits models discount future but-for profits to present value and may apply prejudgment interest to past losses; the discount rate should reflect the risk of the projected cash flows, not merely a risk-free rate. Lost business value models embed risk in the valuation discount or capitalization rate. The measurement date, which may be the date of harm or the date of trial depending on the jurisdiction and the theory of the case, affects what information the analyst may consider and should be settled with counsel before the analysis is built.

Admissibility and the analytical record

Federal Rule of Evidence 702, as amended effective December 1, 2023, makes explicit that the proponent must demonstrate by a preponderance of the evidence that the expert's testimony rests on sufficient facts or data, reliable principles and methods, and a reliable application of those methods to the case. For a damages expert this has a concrete implication: every input in the model should trace to a document, every assumption should be labeled as such, and the sensitivity of the conclusion to the principal assumptions should be shown rather than concealed. An analysis that survives cross-examination is one in which the opposing expert can locate every number.

What counsel should assemble

Before engaging an expert, counsel can materially improve the quality and cost of the analysis by gathering: monthly financial statements for at least three years before the harm and through the present; tax returns for the same period; budgets and forecasts prepared in the ordinary course; customer, contract, and pricing records bearing on the lost revenue; and any contemporaneous correspondence describing the injury and its expected effects. With those materials, the expert can advise promptly on the appropriate measure, the likely method, and the defensible range, and counsel can plead damages with a theory the evidence will support.