Resolution Experts, PC

Valuation vs. Lost Profits:

Which Method Should You Use to Determine Damages

Often, but not always, there is more than one-way to reach the same destination. This is true when attempting to determine damages in a commercial dispute.

One question the damage expert must address when determining damages in a commercial dispute is, "should I calculate damages based on lost enterprise value or on lost profits?" The answer is, (you guessed it) "it depends." This blog will discuss what "it depends" relies upon.

Damage Overview:

Damages are intended to put the injured party in an economically equivalent position but for the injury. In a contract dispute this would be the expectation of the injured party, while in a tort case this is generally the reliance cost suffered by the injured party.

It is up to the damage expert to determine with reasonable certainty the dollar amount that will make the injured party whole. The challenge for the expert is varying case law, and the fact that valuation damages and lost profit damages are after all just best estimates. The damage calculation must therefore reflect case law, and produce a result that is the most reasonable under the circumstances, and which meets the court's scrutiny.

When to Use Valuation - First and Foremost:

The valuation approach is the preferred approach in cases involving a transition in business ownership or the destruction of the business.

Business Value Graph

Matters in which the business is transitioned or destroyed include:

  • Shareholder Oppression
  • Dissenting Shareholder
  • Tax Court
  • Family Law
  • Business Destruction

    Business valuation may also be considered the preferred approach to determining damages in matters involving the permanent impairment or diminution in business value.

  • Business value graph

    When to Use Lost Profits:

    The lost profits approach to damages is most commonly used in cases where the harmful impact is finite.
    Business Valuation Graph

  • This lost profits damage approach is generally found in disputes where the damages are for specific time period or cash flow. For example:

  • Breach of contract
  • Intellectual property
  • General commercial litigation


The damage expert will always face the choice of whether to use a valuation approach or a lost profits approach when deciding how to calculate damages in a commercial dispute. Ideally, all other things being equal, either approach should lead to the same result. However, all other things are rarely equal.

The preceding discussion covered only some of the considerations the damage expert will take into account with evaluating lost sales associated with business interruption. The relevance of these considerations and numerous others will always depend on the specific facts of the matter being evaluated.

ResX Forensic Accounting services is founded on two principles:

  1. Uncover the answer
  2. Explain the answer

The key is to uncover the right answer and then to explain it to an audience that has no prior understanding of forensic accounting. Our clients benefit because we can get to the right answer quickly and efficiently, and because we can explain the answer clearly to the trier of fact.

Experience is what makes ResX Forensic Accounting unique.

Industries that we specialize in include: Manufacturing, Entertainment, Construction and Real Estate Development, Software Development, Healthcare.

Our areas of expertise include: Intellectual Property, Breach of Contract, Business Interruption, and Business Valuation.

ResX, provides independent forensic accounting services for complex litigation and contract compliance and fraud. ResX is based in Michigan and serves clients throughout the United States. For more information and to learn about working with ResX, please visit our website: or follow us on LinkedIn.


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