Damages From a Business Disruption:
Building a Solid Lost Profits Claim

A supplier walks away mid-contract. A fire shuts down a plant for a quarter. A competitor poaches a key account using stolen information. In each case the client arrives at your office certain of one thing: the disruption cost them money. The harder question, the one that decides whether the claim survives, is how to prove it.

Lost profits are recoverable, but recovery rarely depends on the size of the loss. What matters is the quality of the proof. Courts do not compensate a business simply for having been harmed. They compensate it for a loss that flows from the defendant’s conduct, measured with reasonable certainty, and supported by sufficient data.

This article walks you through how a forensic accountant measures that loss, what goes into the calculation, and where these claims most often come apart.

What “lost profits” actually means (and doesn’t mean)

Let’s start with the definition we use in every engagement: lost profits are the profits a business would have earned but for the alleged harm, compared to what it actually earned. The gap between that “but-for” world and the real one is the loss.

The most common client misconception is that lost profits means lost sales. It does not. Lost profits are net – the lost revenue reduced by the costs the business avoided by not making those sales. A claim that asks for lost revenue without subtracting avoided costs overstates the damage and hands the other side an easy cross-examination.

One distinction worth drawing early: lost profits are not the same as lost business value, but they overlap. When a disruption merely impairs a business that survives, lost profits are usually the better measure. When the disruption destroys the business outright, the better measure is usually lost business value. The two measures overlap, and the point to watch is not to recover both for the same loss. Claiming the lost profit stream and the capitalized value of that same stream is double counting. For most business-disruption matters, the lost profits framework is the better tool for measuring loss.

Standards the forensic accountant must live by

It is tempting to frame proof of lost profits purely in legal terms – causation, reasonable certainty, foreseeability. Those burdens matter, and they overlap heavily with what follows. For counsel, though, the practical lens is the evidentiary foundation the expert must build, because that is what the damages number actually stands on. The expert’s role stays narrow and concrete – build a foundation that holds up under scrutiny.

Two sets of standards govern that foundation:

Federal Rule of Evidence 702, which asks whether the opinion is based on sufficient facts or data, is the product of reliable principles and methods, and reflects a reliable application of those methods to the facts of the case.
AICPA Code of Professional Conduct, which applies to Certified Public Accountants. It obligates a CPA to exercise due professional care and – critically here – to obtain sufficient relevant data to afford a reasonable basis for the conclusion.

Together, these standards describe the same discipline: a credible lost profits opinion rests on enough of the right data, run through a recognized method, applied honestly to the facts. They also speak to what a damages case has to establish. Reliable data and a sound carefully applied method are what help the trier of fact weigh the larger questions of causation and reasonable certainty. Independence is the connective tissue: an expert who serves only as a human calculator for hypothetical scenarios built on unfounded inputs is neither credible under Rule 702 nor compliant with professional standards.

Building the number that withstands scrutiny

A complete lost profits analysis has three working parts: the lost revenue, the costs the business avoided, and any extraordinary out-of-pocket costs the disruption forced it to incur. Understanding how an expert approaches each one helps counsel see both the strength of their own claim and the soft spots in the opposing expert’s analysis. For a more in-depth walk-through of these building blocks, see our series, Forensic Accounting: Five Pillars of a Lost Profits Analysis.

1. Lost revenues – the “but-for” world

Lost revenue is the most material part of nearly every calculation, and there are three recognized ways to estimate it.

The before-and-after method compares the business’s performance before the disruption to its performance after, evaluating the shortfall against the defendant’s conduct. It works most easily when the company has a stable operating history and the disruption is a discrete event. Its challenges relate to the causation link: the expert has to account for other causes than the defendant – a recession, a lost employee, negative publicity – that could explain the drop.

The yardstick method benchmarks the injured business against comparable firms, comparable locations, or industry data. It is valuable when the company is newer or when the disruption affected the entire operation, leaving no clean “before” period to measure against. The benchmark has to be genuinely comparable; a mismatched yardstick is one of the first things a good rebuttal expert will expose.

The company-projection method reconstructs the revenue the business would have earned from its own forecasts, budgets, or pipeline. Its persuasiveness rises and falls on the support behind the projection. Forecasts prepared in the ordinary course of business, before any dispute arose, and borne out by the company’s track record carry real weight. Projections built after the fact, untethered to history, and unsupported by market evidence do not – and they invite exclusion.

Strong analyses often triangulate, corroborating one method with another. Agreement across approaches both strengthens reasonable certainty and blunts cross-examination.

2. Avoided costs – separating variable from fixed

Once lost revenue is estimated, the expert subtracts the costs the business saved by not generating that revenue. Only variable costs – the ones that move with sales, such as materials, commissions, and freight – are deducted. Fixed costs that continued regardless, like rent and salaried payroll, generally are not, because the business bore them whether or not the lost sales occurred. We go deeper on this distinction in Lost Profits Analysis Pt. 2 – Avoided Costs.

The complication is that many costs are neither purely fixed nor purely variable. Identifying the variable portion is real forensic work.

In one recent matter, an expense category combining “office supplies and software” looked semi-variable on its face – printing and presentation materials move with activity, while annual software licenses do not. The team confirmed the mix by reviewing actual transactions, posing interrogatories to management (who explained that operations had shifted from in-person conferences to online video), and running a regression that showed a strong correlation between the account and sales. The trendline let them estimate the fixed portion (the intercept) versus the variable portion (the slope) rather than guessing. That kind of grounded cost analysis is exactly what “sufficient relevant data” looks like in practice.

3. Extraordinary out-of-pocket costs

A disruption often forces a business to spend money it otherwise would not have – and those costs belong in the claim if they can be documented. Picture a product recall: the company hires a PR firm to protect the brand, pays freight to ship replacement parts, and runs extraordinary overtime to clear a backlog. Each is a real out-of-pocket cost supported by contracts, invoices, and receipts.

Equally important is recognizing which costs do not qualify. In our experience with lost profit cases, the time salaried managers and engineers spend handling the crisis is generally not a separate out-of-pocket cost – the company was already paying their salaries. Neither is a share of general overhead, such as rent or administrative salaries, that the business would have incurred regardless of the disruption.[1]

Counsel should expect a credible expert to claim only costs backed by evidence and should expect the other side to test whether each one is truly incremental.

Taking into account mitigation and the period of loss

Two further questions shape the final figure. The first is mitigation: when a business reduces its loss by earning direct replacement revenue, that benefit should already be captured in the lost-revenue analysis, where the but-for figure is measured against what the business actually earned. Gains the business realized for reasons unrelated to the disruption are a different matter; they should be ignored, not credited against the loss. A defense expert will test whether both have been handled correctly.

The second is the period of loss: the timeframe over which damages should be measured. Did the business recover, and if so, when? Is there a contract that has a definite time period, over which damages should be measured? Is the loss permanent, or does it taper as the company rebuilds? A claim that runs the loss indefinitely, with no analysis of whether and when the business would have recovered, is a vulnerability an opposing expert will press. Pinning down the start and end dates is often where plaintiff and defense experts often diverge.

Where these claims fall apart (and how to prevent that)

Most lost profits claims come apart in predictable ways, which also means those failures are avoidable. Damages opinions get excluded or discounted when growth assumptions are speculative, when variable costs are not netted against lost revenue, when lost profits and lost business value are double counted, when the model ignores obvious alternative causes for the decline, or when it leans on management projections with nothing behind them. Each of these is, at its core, a Rule 702 problem: insufficient data, an unreliable method, or a method unreliably applied.

The best protection is an expert who has already built the rebuttals into the analysis, tested the alternative causes, supported the benchmark, and grounded every assumption in the records before opposing counsel ever files a motion.

The earlier we’re brought in, the better

If there is a single takeaway, it is that the strongest lost profits claims (and the most effective challenges to them) take shape early, well before discovery closes. An expert brought in at the outset can help you identify the documents to request, anticipate what the other side will have to prove, and find the places where the numbers are most exposed. By the time the report is due, the foundation is either there, or it isn’t.

We’re always happy to talk through a matter while there’s still runway to shape it. If a deeper dive into this topic would be useful, we also offer CLE sessions on proving and challenging lost profits, and you can find more on our Lost Profits Damages practice page.

[1] Construction delay cases can be an exception to this rule as we have seen some case law that permitted damage claims on underutilized overhead.

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Kevin Marold, CPA, ABV, CFE, CFF is dedicated to the pursuit of justice. He brings close to two decades of professional accounting experience and strong technical acumen to each case, with a background serving in audit at global accounting firms and in-house with Nike.

Kevin’s collective experience makes him a valued expert on forensic accounting investigations and damages analysis for litigation and business valuation. He works with commercial litigators, DOJ lawyers, family law attorneys and corporations to solve financial puzzles that help resolve disputes and testifies in support of his opinions.

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