Economic Damage Calculation Case Studies can offer a better understanding of how our services can be used.
While definitions and descriptions can provide useful information regarding forensic accounting, business valuation, and the calculation of economic damages, placing those services in a real-world context facilitates a better understanding of how those services can be used or combined to conduct an in-depth financial analysis.
The following economic damage calculation case studies represent fictitious situations that align with various cases we have worked on over the years. If you would like more information regarding how our professional services may be helpful to you, please contact our office.
Up In Smoke…
Fact Pattern –
Patti was an early investor in Sin City High Rollers, a vertically integrated marijuana operation that has enjoyed almost four years of demonstrable growth. At the outset, Patti provided the funds for licensing and operations, Dianne provided operational and technical expertise, and Bernie provided management services. All three were equal equity owners in the cannabis company.
While their product remained federally illegal, the state and county in which they were operating had allowed medical use for almost the duration of the company’s existence and had allowed recreational use for the last few years.
Before recreational use had been legalized in their state, Patti made a number of capital infusions to support growth. These infusions were obviated once recreational use became legal and the company’s growth was fully funded by operations. And therein lay the current dilemma.
The company had been building up substantial cash reserves in the last year but as yet none of the equity owners had received a dividend. While both Dianne and Bernie receive compensation for the employee services they render to Sin City High Rollers, Patti, as an owner but not an employee, has failed to enjoy any financial reward from her investment.
The company recently received an acquisition offer from a competitor that Dianne and Bernie would like to explore, against Patti’s wishes. While assessing her options, Patti is informed by an attorney that the company’s corporate documents are ambiguous as to Patti’s ability as a one-third owner to rebuff the proposed transaction.
Important Considerations –
A situation such as this can contain substantive elements of business valuation and/or economic damages. Even if the shareholders forego litigation to resolve their differences, Patti, Dianne, and Bernie will still need to undertake sufficient due diligence to ensure that they make informed decisions relative to the offers tendered by the potential acquiror. If Patti decides to litigate her disagreement with the proposed transaction, through either a dissenting shareholder action or an economic damages claim, then an economic damages expert could assist by either 1) valuing the business under the standard of value required for a dissenting shareholder action in the company’s registered state or 2) understanding and framing the but-for and actual scenarios that inform an economic damages claim, including the import of Patti’s capital infusions during the early (pre-recreational use) years and disproportionate claims she may have to cash reserves if her post-initial capital infusions did not increase her equity interest and were otherwise not rewarded or repaid (if they had been characterized as loans).
For more information regarding business valuation or economic damage calculations like these economic damage calculation case studies, please visit our services page or contact us for assistance with a specific issue.
When the road hits back…
Fact Pattern –
The transportation company, Be There, was between a rock and a hard place. The company’s largest customer was an R&D facility that had very specific transportation needs. In order to meet these needs, Be There had a highly customized fleet of vehicles. Unfortunately, this customization came at a price, as the company was significantly reliant upon a fabrication company for many of its customization needs. The fabrication company had recently been taken over by new management, which new management had decided to go into direct competition with Be There, despite non-competition agreements between the two companies. As part of this new playing field, the fabrication company had completely stopped servicing Be There, and had indicated that it would no longer honor any of its contractual relationships with the transportation company.
Important Considerations –
In most situations wherein economic damages must be calculated, it’s important to understand the causal nexus that connects certain damaging events (in this case, the fabrication company’s breach of contract) to certain alleged damages (in this case, Be There’s lost profits based upon the breach of contract). While attorneys address the attendant liability issues, it is within the financial expert’s realm of expertise to determine the financial extent to which economic damages can be traced and quantified from the alleged events to the alleged impairments.
By way of example, Be There’s lost profits in this situation may include profits lost because of capacity limitations given its current fleet and the knowledge that specialized vehicles might not be procurable from alternative fabrication companies. The lost profits may also include the destruction of the entire Be There business if the potential loss of its largest customer, the R&D facility, irreparably destroys Be There’s operations. Incumbent within these observations are other considerations, such as mitigation, or the extent to which Be There might have been able to reduce its alleged lost profits. Ultimately, the financial expert must address these issues adroitly, while also avoiding the pitfalls that often encumber such analyses.
For more information regarding calculation of economic damages like these economic damage calculation case studies, please visit our services page or contact us for assistance with a specific issue.
Finding the ego within…
Fact Pattern –
Jerry was the president of VCNV, Inc. (“VCNV”), a venture capitalist company that provided funding primarily for real property development. Jerry’s daughter, Gina, was the vice president and his personal trust was the sole shareholder of the company. Essentially, VCNV received money from investors and provided loans to various entities and individuals for the development of real property.
Jerry was also the majority owner of Real Construction, Inc., a company that specialized in real property construction and development. Jerry did not disclose to the VCNV investors that he was a majority owner in this company, which received several loans from VCNV throughout the years.
Unfortunately, many of VCNV’s investments were recently “lost” and written off as bad debt. Jerry also recently acquired a 100 percent ownership interest in VCNV through an alleged purchase from his personal trust. Jerry is now listed as VCNV’s President, Director, Secretary, and Treasurer on the corporate paperwork.
Several of the investors in VCNV have filed a complaint against VCNV, Real Construction, Inc., Jerry, Gina, Kelly (Jerry’s wife), and Jerry’s personal trust. The VCNV investors are alleging that VCNV entered into several investments without performing adequate due diligence, that VCNV failed to properly inspect the properties/ investments, that VCNV failed to disclose material facts when obtaining funds from investors, and that VCNV used investor funds to purchase certain property without the knowledge and consent of the VCNV investors. The VCNV investors are also claiming that Jerry, his other companies, and his family are alter egos of Jerry and should be held jointly responsible for the actions of VCNV.
Important Considerations –
In a situation such as this one, an economic damages expert could assist in understanding the corporate structure of the various entities involved, evaluate the extent to which the parties involved interacted in ways that are indicative of alter ego, analyze the extent to which the corporate formalities were (or were not) maintained and how the corporate veils may be pierced, evaluate damages associated with the claims alleged against the defendants, and assist in evaluating the “lost” investments.
For more information regarding calculation of economic damages like these economic damage calculation case studies, please visit our services page or contact us for assistance with a specific issue.
The best offense is a good defense…
Fact Pattern –
Justin was the owner and manager of Division 1 Sports Preparation Academy (“DSPA”), a college-oriented sports training facility. Recently, Justin cancelled a service contract with one of DSPA’s vendors to go with a competitor who was offering better prices on training supplies. A few months later, Justin and DSPA were served with a lawsuit from the vendor claiming economic damages due to an alleged breach of contract.
As the lawsuit progressed, Justin had to decide whether to hire an expert to proactively determine whether any damages were in fact incurred or wait until plaintiff’s expert witness provided an expert witness report that calculated alleged damages.
When plaintiff finally disclosed their expert report, Justin had difficulty understanding the expert’s report and was surprised to see so many zeros at the end of the damages calculation.
Important Considerations –
In a situation such as this one, an economic damages expert could assist in understanding plaintiff’s calculation and methodology, help provide questions for the deposition of plaintiff’s expert, and prepare a rebuttal report to plaintiff’s report. Anthem would also be able to consult with the parties and counsel regarding realistic damages calculations and whether there is any validity to plaintiff’s analysis.
For more information regarding calculation of economic damages like these economic damage calculation case studies, please visit our services page or contact us for assistance with a specific issue.