1/6/2012

Florida Institute of Certified Public Accountants VALUATION, FORENSIC ACCOUNTING  AND LITIGATION SERVICES CONFERENCE Friday, January 6, 2012

LO ST PROFITS V.  BUSINESS  VA LUATIO N:  DISPARATE, NOT  DESPERATE TAC TICS! LARI B. MASTEN, MSA,  C PA / A B V / C F F,   C V A ,   A B A R JANUARY 5 – 6,  2012  FT. LAUDERDALE, FLORIDA  SHERATON FT. LAUDERDALE AIRPORT HOTEL

PRESENTATION RESOLUTION • This presentation has been prepared for use in connection with continuing professional education. It is not intended to reflect the opinions or positions of the author in relation to any specific case, but rather to be illustrative for educational purposes, and to provoke discussions, some of which may be controversial. • Any statement, comment or notations of any kind made by the author and/or participants is assumed to be hypothetical in nature and made to generate discussion; these shall not be construed as that person’s opinion. • No participant shall use any statements made herein for any other purpose, and if done, this policy shall be produced to demonstrate that such statement is not the opinion of the person to whom attributed, rather that it was merely a hypothetical remark in an educational discussion.

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PRESENTATION RESOLUTION Each valuation analysts must used in informed judgment in selecting the appropriate data to use in arriving at his or her valuation conclusion. This includes the methodology applied as well as the sources used. Circular 230 Disclosure: The information in this presentation is not intended or written to be used, and cannot be used by any person or entity for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any applicable state or local tax law.

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PURPOSE OF PRESENTATION Provide foundation and clarity regarding the basis for selection of various methodologies when preparing a financial analysis relating to business value and/or damages for purposes of litigation.

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OBJECTIVES OF PRESENTATION 1. Overview the fundamentals of damages awards in litigation 2. Overview the fundamentals of business valuation and lost profits methodologies 3. Clarify the inherent differences in these fundamentals

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GOAL OF DAMAGE & AWARDS IN LITIGATION

BV – Allocate value to a shareholder, decedent’s estate or marital estate. Applied almost exclusively in: • Entire business destruction • Shareholder oppression • Dissenting shareholder • Marital dissolution, and • Tax court Used when damages represent value into perpetuity, and not for a specified period of time – as defined by the nature of the action filed.

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GOAL OF DAMAGE & AWARDS IN LITIGATION BV - Permanent business value impairment/diminution in value cases often relying on business valuation as an appropriate measure: • M&A disputes, • Defamation and/or slander, and • intentional business destruction Damages measure in these types of cases may be based on the difference between the value of the business in the but-for world and its actual value.

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GOAL OF DAMAGE & AWARDS IN LITIGATION Lost Profits –make the plaintiff whole/put in the same position, ‘but-for’ the defendant’s actions that gave rise to the alleged damages Applied almost exclusively to: • Business interruption • Breach of contract • Intellectual property infringement

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GOAL OF DAMAGE & AWARDS IN LITIGATION Lost Profits awarded only when injury can be related to an identifiable cash flow Lost Profits commonly calculated based on • difference between expected profits assuming no harmful event and • actual profits achieved/estimated to be received

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GOAL OF DAMAGE & AWARDS IN LITIGATION Lost Profits • •

Typically measured for a specific, limited time period and not into perpetuity Courts reluctant to award lost profits damages over extended periods of time due to the speculative nature of the underlying projections

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FUNDAMENTALS OF DAMAGE & AWARDS Mitigation - duty to mitigate imposed on the claimant • Reasonable effort to limit losses during the damage period resulting from breach or tort • Could also apply to business valuation - for example related to salvage value - 8th Circuit in 2007 noted: “Calculating the value of an asset at liquidation or disposition is a necessary part of the discounted cash flow analysis.”

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DAMAGES TIMELINE

Date of  Claimed  Act or  Damage

Time Value of  $$ and  Prejudgment  Interest (if  applicable)

Date of  Trial

Present Value  Future Damages to  Date of Trial End of  Damage  Period

Damages Occuring from Date of Claimed  Act or Breach

Future  Damages

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EX ANTE VERSUS EX POST DOCTRINES Ex ante: Latin “from before”  Fundamental Premise: based on subjective assumption and prediction prior to the violation  Assumes: all lost profits are future lost profits and must be discounted back to the date of the breach, with no historical component  Hindsight: should not be used; ex ante damages based on information known or reasonably knowable through the date of the defendants wrong-doing

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EX ANTE VERSUS EX POST DOCTRINES Ex ante: Latin “from before”  Objective: make plaintiff whole as of the time of the violation/harm  Making Plaintiff Whole: o lost profits discounted using a risk-inclusive rate based on ex ante premise “from before” as of the violation date o the violation date lost profits are subject to a riskfree rate when adjusting to the trial date

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DAMAGES TIMELINE

Passage of Time

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EX ANTE VERSUS EX POST DOCTRINES Ex post: Latin “from after”  Fundamental Premise: based on knowledge and fact; in hindsight, objective and retrospective after the date of harm o Owner has the rights to both the risks and rewards of the lost asset identifiable over time  Hindsight: Injury occurs over time; hindsight should be used when it can return either the risks or the rewards of the asset to the plaintiff

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EX ANTE VERSUS EX POST DOCTRINES Ex post: Latin “from after”  Objective: make the plaintiff whole for all time o The harm and trial dates are not simultaneous o Legal violation is not a legitimate asset exchange and represent the constructive passage of title and forced sale of the damaged asset

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EX ANTE VERSUS EX POST DOCTRINES Ex post: Latin “from after”  Making Plaintiff Whole: o lost profits incorporate hindsight/objective risk assumptions post the violation o the discount rate doesn’t need to incorporate risk of ownership o “from after” hindsight premise, post violation and prior to trial, is used, thus risk is already incorporated

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EX ANTE VERSUS EX POST DOCTRINES Ex post: Latin “from after”  Making Plaintiff Whole: o the violation date lost profits are quantified through trial date using prejudgment interest based on timing of the ‘but for’ cash flows as determined by the expert o Future lost profits are present valued to date of trial using borrowing rate or investment rate

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DAMAGES TIMELINE

Passage of Time

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Differences between Ex Ante and Ex Post Calculations Damage Component Ex Ante Ex Post Use of information  known or knowable on  Use all available  the date of the claimed  Information information (hindsight) act; ignore subsequent  events Date of Analysis/Trial  Measurement Date Date of Claimed Act Date

Discounting

DCF to Date of Claimed  Bring past damages (CF)  Act using either  to PV using interest rate  plaintiff's investment  of the plaintiff's market  rate or debt rate;  investment rate or debt  Prejudgment interest  rate.  Discount future  on amount to trial  damages (CF) to trial  date. date.

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EX ANTE VERSUS EX POST WHICH TO USE?? Court trends for decades has been to support ex post for computing business damages, with few exceptions Case law indicates that for a damages analysis:

 Experts should incorporate all information (even post damage date)  To make claimant whole (but-for the claimed act) o use all available information in reconstructing the butfor-world o reflect all the subsequent events that have contributed to and/or limited damages suffered by the plaintiff

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DISCOUNT RATES If not all uncertainty/risk resolved in expectation projections, then  Discount rate may contain a factor to account for unresolved risk not addressed in projection  Highly certain economic income discount rate that investor would have used to purchase the asset in free market exchange (– i.e. defendant’s borrowing rate)  At lower rate to recognize and quantify plaintiff’s loss by constructive forced sale of the asset’s ability to return an element of owner economic profit above plaintiff’s marginal cost of capital

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FUNDAMENTALS OF DAMAGE & AWARDS Subsequent Events a. Business Valuation – generally will not take into account subsequent events unless known or knowable as of the valuation date b. Lost Profits – it depends… a. ex ante or ex post ??? (more on this later…) b. Generally analysis takes post-breach events into consideration

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FUNDAMENTALS OF DAMAGE & AWARDS Subsequent Events (cont’d) What about estimates surrounding a tipping point date? • Business Valuation date of 8/31/08 • Lost Profits analysis based on a claimed harm event on 8/31/08

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FUNDAMENTALS OF DAMAGE & AWARDS Subsequent Events cont’d  9/7/08: Fannie Mae &Freddie Mac placed in government conservatorship  9/15/08: BofA intent to purchase Merrill Lynch announced; Lehman Brothers files for Chapter 11  9/16/08: FRB approves $85 Billion loan to AIG  9/17/08: SEC announces temporary emergency ban on short selling stocks of all companies in the financial sector  9/21/08: US Treasury submits draft legislation for authority to purchase troubled assets.  10/14/08: US Treasury announces Troubled Asset Relief Program - $250 billion  10/28/08: The U.S. Treasury Department purchases a total of $125 billion in preferred stock in nine U.S. banks under the Capital Purchase Program.

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FUNDAMENTALS OF DAMAGE & AWARDS Subsequent Events (cont’d) Would there be a difference between the BV and the Lost Profits based on subsequent events?

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FUNDAMENTALS OF DAMAGE & AWARDS Role of Trier of Fact 1. Determine if evidence proffered supports legal claims regarding breach or tort 2. “But-for” benefit stream/economic income • Opine as to level of risk, • Opine as to certainty or uncertainty

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FUNDAMENTALS OF DAMAGE & AWARDS Role of Expert 1. Quantify probably damages (reasonable degree of probability) 2. Develop estimates using sufficient, competent evidence 3. Use methodology and techniques accepted by knowledgeable practitioners 4. Document basis for estimate of damages

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FUNDAMENTALS OF DAMAGE & AWARDS Expert’s Choices: Methodologies and Techniques 1. Lost Profits vs. Diminution of Business Value vs. Both 2. Based on a range of theories and practices developed outside of the litigation system

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FUNDAMENTALS OF DAMAGE & AWARDS 1. Two most common approaches to quantify economic damages - Business Valuation & Lost Profits 2. Both share similar economic and financial principles 3. Reconciling dissimilarities between the two: • Each can lead to very different outcomes. • Which one is/are both allowed in a specific case? • Will one approach make the injured party whole and the other not?

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FUNDAMENTALS OF DAMAGE & AWARDS Questions that need to be answered: 1. What would the business have earned “but for” the damaging event? 2. What other damages occurred? 3. What additional expenses have or will be incurred? 4. How long is the period of loss? 5. What is the growth rate of damages over the loss period? 6. At what rate should the damages be discounted to present value? 7. Should legal interest be applied to past losses?

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FUNDAMENTALS OF DAMAGE & AWARDS Questions that need to be answered (cont’d): 8. Should income taxes be considered? 9. What are the key dates involved in the calculation? 10.What is the jurisdiction? 11.What is the applicable law surrounding the damages? 12.Other relevant information? o Background and History of the business o Historic Financial performance and Earnings Capacity o Management performance/depth o Benchmarking against Industry o Expense analysis – fixed, variable, step-fixed

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BUSINESS VALUATION INPUTS Standards of Value  Fair market value (tax court, some marital dissolution; willing buyer/willing seller)  Investment value (shareholder oppression/dissenting shareholder; specific buyer or seller with specific motivation and synergies)  Fair value (shareholder oppression/dissenting shareholder/marital dissolution; varies by state, similar to FMV but considers ‘fairness’ and may exclude discounts) Incorporates DLOM & DLOC depending on standard & interest valued

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BUSINESS VALUATION INPUTS Benefit Stream  Values benefit stream into perpetuity o Expected cash flows using all revenues and expenses the business is expected to produce o Enterprise or Equity value derived  Risk of investment adjustments incorporated in cap rate (to lesser degree in benefit stream)

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BUSINESS VALUATION INPUTS Rates of Return    

Risk-free rate Cost of debt Cost of equity (BUM, CAPM) WACC

All are derived from capital markets where transactions that define/create the rates of return are based on willing buyer/willing seller

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BUSINESS VALUATION INPUTS Fundamental inputs for BV are based on the Free Market principle:  Goods/services voluntarily exchanged  Competitive market  Prices are determined by supply and demand

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BUSINESS VALUATION INPUTS Measurement Date  Single point in time  Value derived based on known or knowable events  Hindsight is not employed

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BUSINESS VALUATION METHODOLOGIES  Use of discounts and premiums (depends)  Value to subject interest premise  Valued on date of harm  Asset approach  Income approach  Market approach - Value from selected approaches are reconciled to reach a conclusion of value

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BUSINESS VALUATION METHODOLOGIES  Asset approach considers FMV of the assets and doesn’t capture value of the intangible assets of the business without incorporating other methods

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BUSINESS VALUATION METHODOLOGIES  Income approach takes into consideration the normalized benefit stream with these adjustments: - non-recurring - non-operating - discretionary - strategic (only used in potential acquisition situations)

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BUSINESS VALUATION METHODOLOGIES  Income approach three key variables: - Amount of future benefits - Company’s cost of capital required to generate those future benefits - The timing of the future benefits/returns Damages are taxable income; avoid double deduction of taxes - 1st for calculation and 2nd when actual payment is received

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BUSINESS VALUATION METHODOLOGIES  Market approach (transactions or public market as indicator of value): - Based on principle of substitution - Value reflects trends in market - Relies on benchmarking to determine comparability

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BUSINESS VALUATION METHODOLOGIES  Liquidation of remaining assets should be calculated  Serves as a proxy for mitigation  Damages = value of the damaged business (complete loss) less mitigation (salvage value of asset)  Conceptually: objective is to provide the plaintiff with funds to purchase another similar business

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BUSINESS VALUATION METHODOLOGIES  Lost economic income projections used as a basis for benefit stream  ‘But-for’ projection will likely be challenged o overly optimistic and unattainable premises o trier of fact may resolve issue of risk for ‘butfor’ economic income

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BUSINESS VALUATION METHODOLOGIES  8th Circuit notes that “Delaware courts and the financial community have recognized the discounted cash flow model as a preeminent valuation methodology.”  5th Circuit notes that lost asset damages from a breached agreement were “determined by considering what a hypothetical buyer would pay for the chance to earn future profits.”

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LOST PROFITS INPUTS Standards of Value – none, basically…  Reasonable Certainty – Evidentiary Standard  Make damaged party whole  No willing buyer/seller – forced event o Buyer’s (defendant’s) motives are usually subject of litigation o Seller’s (claimant’s) motive is to be made whole  DLOM & DLOC are not discussed

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LOST PROFITS INPUTS “Damages are not rendered uncertain because they cannot be calculated with absolute exactness. It is sufficient if a reasonable basis of computation is afforded, although the results be only approximate.” - Eastman Kodak Co. v. Southern Photo Materials, 273 U.S. 359 (1927)

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LOST PROFITS INPUTS Florida: Holding that in order to recover lost profits, claimant must prove that “1) the defendant’s action caused the damage and 2) there is some standard by which the amount of damages may be adequately determined” - W.W. Gay Mech. Contractor, Inc. v. Wharfside Two, Ltd., 545 So. 2d 1348, 1350–51 (Fla. 1989)

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LOST PROFITS INPUTS Pre-tax Benefit Stream – one of two ways to capture: 1. Capture all of the business’ expenses in both the expected revenues and actual revenues scenarios o Variable expenses and some other expense differ o Fixed expenses continue under either scenario

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LOST PROFITS INPUTS Pre-tax Benefit Stream – one of two ways: 2. Capture only the incremental revenues less avoided costs If losses extend into the future, they are present valued at the appropriate discount rate to the date of trial. In either case, the result should be the same.

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LOST PROFITS INPUTS Rates of Return Purpose  Mimic achieved rates of return on actual investment options to plaintiff if cash flows had been received  Historical returns relate to risk-resolved streams of economic income (hindsight)  Prospective returns valued with rates that accommodate unresolved risk that hasn’t been removed from the income projections

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LOST PROFITS INPUTS Rates of Return = Time value of $$ based on two principles  Application to time frame of past and future income (ex ante vs. ex post)  Risk-free from default (business risk should be accounted for in development of lost profits under ex post)

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LOST PROFITS INPUTS Rates of Return (cont’d) Most typically are  Statutorily dictated (FL: 4.75% as of 1/1/12)  Cost of claimant’s debt  Market investment rate Federal courts have ruled that rates should be “best and safest” - The only investment rates meeting this criteria are obligations of the US government

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LOST PROFITS INPUTS Rates of Return (cont’d) Exception – use caution when faced with  Hoped-for income streams – initial venture capital investment opportunities  Early-stage/extremely high-risk technologies - Expected value valuation discount rates more closely approximate the achieved rates as reported by Morningstar and Duff & Phelps

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LOST PROFITS INPUTS Fundamental inputs for Lost Profits are NOT based on the Free Market principle (unlike BV):  Goods/services involuntarily exchanged on date of harm  No competitive market – claim gives rise to an unfair market  Prices are determined by estimates of market size and other competition, under the premise that the harm did not occur  All of the above are determined using hindsight post harm date

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LOST PROFITS INPUTS Measurement Date  Starts on date of harm/claimed act  Ends when estimate of damage period is over, or when effects of harm by defendant are no longer evident o Can be limited by contract, case law, or by statute  Past lost profits  Future lost profits  Value derived based on knowledge of events post harm date (expectations versus actual performance)  Hindsight is typically employed

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LOST PROFITS INPUTS Considerations for loss period include changes in:     

Economy Competition Technology Regulatory environment and changes Systemic events - 9/11, earthquakes (Japan/Haiti), international economic development – G20

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LOST PROFITS METHODOLOGIES Lost Profits – business injured if harm comes to its income, goodwill, reputation, product lines, etc. 2 possible claims: a. If the business completely destroyed = BV on date of loss event b. If business not completely destroyed = cumulative lost profits due to the loss event

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LOST PROFITS METHODOLOGIES Exception to 2 possible damages claims: a. Business not initially destroyed, and continues to operate for a period of time before closing b. Damage may equal lost profits for a period of time followed by the value of the business as of the date of closing Fundamental of this exception - NO DOUBLE DIPPING!!!!

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LOST PROFITS METHODOLOGIES Two basic methods, with a few variations  Before-and-after method  Yardstick method  Statistical Forecast/Sales projection (based on economic modeling)  Market Share o Variation: accounting for defendant’s profits  Other approaches – calculation based on the terms of the contract - One method usually prevails given facts of the case; if more than one method used, must be reconciled

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LOST PROFITS METHODOLOGIES Before-and-after method 1. Damage period has to be concluded/normal operations resumed 2. Compares profit before claimed act and profits after claimed act when normal operations achieved 3. Best for stable businesses with a history of performance – subject to less dispute if based on plaintiff’s historic accounting records 4. Assumes defendant’s wrongdoing affected plaintiff’s business volume - Did other elements/forces/influences change during that time? (recession, risk?) Have other elements been incorporated in analysis?

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LOST PROFITS METHODOLOGIES Yardstick or Benchmark Method 1. Expert uses an index of firms similar to Plaintiff’s firm (yardstick) and compares the plaintiff’s performance with the index’s performance. a. Actual experience of similar business(s) unaffected by the defendant’s actions b. Plaintiff’s performance at a different location c. Comparable experience and projections by nonparties d. Industry averages e. Pre-litigation projections 2. Compares profits in each period to yardstick.

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LOST PROFITS METHODOLOGIES Yardstick or Benchmark Method (cont’d) 3. Assumes that, but for the defendant’s actions, the plaintiff would have performed as well as the yardstick. 4. Does the yardstick measure other factors that could have caused the plaintiff’s performance to differ, and have those factors been taken into consideration?

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LOST PROFITS METHODOLOGIES Statistical Forecast/Sales Projection Method Uses economic modeling to supply foundation for calculations using regression techniques – loss based on ‘but-for’ approach considering internal and external factors Econometrics (branch of economics that applies statistical methods to the study of economic data and problems).

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LOST PROFITS METHODOLOGIES Statistical Forecast/Sales Projection Method (cont’d) 1. Forecasts ‘but for’ sales using statistical analysis 2. Compares actual performance after the claimed act with the ‘but for’ forecast of performance had the claimed act not occurred 3. How reliable was the forecast – is it an adequate prediction of sales without events of bias? 4. Often used when no “Before” performance for comparison, new product line/IP/Technology

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LOST PROFITS METHODOLOGIES Market Share Method 1. Considers the plaintiff’s market share prior to the defendant’s wrongdoing 2. Assumes a certain market share would have been achieved or maintained 3. Uses market share information to determine the lost sales 4. How reliable is data on the size of the total market? 5. How reasonable is the assumption regarding Plaintiff’s share?

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LOST PROFITS METHODOLOGIES Market Share Variation – Accounting for Defendant’s Profits 1. Relies on accounting records of defendant 2. Common in cases where defendant made the sales in question (unfair competition/misappropriation of trade secrets) 3. Plaintiff entitled to unjust enrichment of defendant attributable to claimed act 4. Would plaintiff have had same experience as defendant with sales? With expenses?

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LOST PROFITS METHODOLOGIES Other Variation – Calculation based on terms of contract 1. Elements of calculation are set forth in Contract 2. Model is developed that calculates revenues anticipated over terms of contract a) Number of units to be sold/bought/manufactured b) Finite time period as defined in contract c) Interest accruals on late payments d) Penalties on failure to perform

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EX ANTE VERSUS EX POST AGAIN – WHAT IS THE POINT?? Ex ante and ex post relate to the dates used and the rates at which the damages or value are brought to the trial date. Concepts are not to be confused with the capitalization rate applied to value the harmed business (if completely lost).

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EX ANTE VERSUS EX POST AGAIN – WHAT IS THE POINT?? Business Valuation • Typically no hindsight • Damage amount established at time of valuation using capitalization rate as applied to benefit stream • WHICH RELIEVES THE PLAINTIFF OF ANY ASSETHOLDING RISK • Therefore, a risk free or statutory rate is used from date of violation to trial date for present value factor

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EX ANTE VERSUS EX POST AGAIN – WHAT IS THE POINT?? Lost Profits • Typically hindsight IS used • present value rates used for time value of money in lost profits calculations are not interchangeable with capitalization rates used in business valuation • past lost profits and future lost profits are both brought to trial date • A statutory rate, risk free rate, or borrowing rate is used

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ARE LOST PROFITS AND BV IDENTICAL PROXIES FOR DAMAGES IN THE SAME CASE? (i.e., Lost Profits cannot exceed BV, therefore damages should be limited to BV when lost profits estimate exceeds the value of the business)

Debated issue – but consider this reasoning by Bob Dunn:

“…if all other things are equal, using the same methodology should produce the same result for lost business value and lost profits. But all other things are rarely equal.”

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*COMMONLY POSED QUESTIONS 1. Do circumstances exist that indicate one (BV) versus the other (lost profits) MUST be used? 2. Can both methods be applied to the same damages calculation? 3. Can lost profits exceed business value? 4. Does one vs. other provide a better estimate of making plaintiff whole/more grounded/empirical approach? 5. What would your peers do? * That you will be able to answer after today’s presentation! 78 (C) 2012 MASTEN VALUATION

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CAN BOTH BE USED TO = TOTAL DAMAGES ON SAME CASE?

Yes, BUT… • Used only on slow demise of business • Cannot double dip • Measuring but-for profits from date of harm to date of decimation of business • Less actual profits • Loss of the business value on date of destruction is reduced by salvage value

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CAN BOTH BE USED TO = TOTAL DAMAGES ON SAME CASE?

Equation: ܽ െ ܾ ൅ ሺܿ െ ݀ሻ ൌ damages to make plaintiff whole a = but-for expected profits b = actual profits received from date of harm to date of decimation c = value of the business on date operations ceased d = salvage value of the business

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LOST PROFITS AND BUSINESS FAILURE/DESTRUCTION $

Date of harm c = but-for business value (a – b) = lost profits

b = actual profits Date of business failure

Time

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WHAT IS DIFFERENT, THAT CAUSES UNEQUAL RESULTS? • Measurement date • •

Ex ante (date of harm) Ex post (date of trial)

• Discount rate • • •

Risk adjusted Risk free rate Plaintiff’s use of funds

• Premise of value • •

Free market exchange Forced sale/diversion of profits

• Income taxes • Damage period • •

Finite or Infinite?

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WHAT IS DIFFERENT, THAT CAUSES UNEQUAL RESULTS? Business Valuation • Implicitly assumes damages into perpetuity • Using fair market value assumes willing seller and doesn’t consider - Risk factors assumed by seller - Marketability and control discounts can decrease damages making it impossible for the damaged party to be made whole

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WHAT IS DIFFERENT, THAT CAUSES UNEQUAL RESULTS? Business Valuation • Using investment value may better represent the plaintiff’s situation • Courts often fall back to FMV because of familiarity • Court may not allow departure from common valuation principles to adjust for necessary differences to make plaintiff whole • Courts may require a specific methodology

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WHAT IS DIFFERENT, THAT CAUSES UNEQUAL RESULTS? Lost Profits • Plaintiff (seller) has been damaged due to acts of defendant (buyer) • Discount rate not tied to cost of capital • Courts usually consider subsequent events • Allows damages over time to be captured • Finite damage period

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WHAT IS DIFFERENT, THAT CAUSES UNEQUAL RESULTS? BV and Lost profits methodologies produce the most similar results when discounted cash flow is used in both cases as the only methodology • BV Income approach = DCF • Lost Profits Sales Projection method = DCF

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WHAT IS DIFFERENT, THAT CAUSES UNEQUAL RESULTS? However, • Be cautious of a hybrid approach to damages using BV where the business is valued ‘before’ and ‘after’ the damaging event, and the resulting opinion of damages is the difference between the two results • Such an approach is NOT the intent of the ‘before and after’ method to lost profits • Consider that the more reasonable approach in this case is to develop the expected profits for the finite period of time, and subtract the actual achieved profits

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USEFUL REVIEW OF DEFINITIONS – DISPARATE, NOT DESPERATE TACTICS! dis·pa·rate/ˈdih-sper-it/ Adjective: Essentially different in kind; not allowing comparison. Noun: Things so unlike that there is no basis for comparison. Synonyms: different - dissimilar - unlike

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USEFUL REVIEW OF DEFINITIONS – DISPARATE, NOT DESPERATE TACTICS! des·per·ate / ˈdes-per-it Adjective :Extreme or excessive. Used or undertaken in desperation or as a last resort: desperate measures. In distress and having a great need or desire: reckless. Leaving little or no hope; very serious or dangerous: a desperate illness. Synonyms: rash – frantic – grave – hopeless

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USEFUL REVIEW OF DEFINITIONS – DISPARATE, NOT DESPERATE TACTICS! tac·tics /ˈtak-tiks Adjective: Of or pertaining to arrangement or order; tactical. *Noun: Strategy; A system or a detail of tactics; A plan, procedure, or expedient for promoting a desired end or result. Synonyms: approach - method – means – procedure *Primary definition: the art or science of disposing and maneuvering military forces for and in battle. 90 (C) 2012 MASTEN VALUATION

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SUMMARY OF FACTORS TO CONSIDER  Willing buyer and willing seller concept  Appropriateness of methodology  Benefits into perpetuity versus finite/limited damages  Normalizing adjustment versus incremental

costs/saved costs  Income taxes  Discounts for lack of marketability and control adjustments

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SUMMARY OF FACTORS TO CONSIDER  ex ante versus ex post  Subsequent events  Discount rates  Opportunity costs  Principle of substitution  Applicable case law from jurisdiction  Who are the plaintiffs/claimants

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QUESTIONS??? Please take a moment to fill out the Presenter Evaluation Forms for this session – your feedback is important to us!

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THIS IS FUN STUFF! COMMENTS AND DISCUSSIONS WELCOME PLEASE CONTACT ME:

Lari B. Masten, MSA, CPA/ABV/CFF, CVA, ABAR Masten Valuation [email protected] 303-331-4430

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