Authored by David Duffus
In our video series on damage issues, we introduced a number of topics relevant to the analysis and quantification of damages. One such topic was the use of assumptions. In matters involving the analysis and quantification of damages, experts invariably need to make assumptions, including:
- The length of the damage period;
- The “but for” performance of the parties;
- The volume of product that would have been sold;
- The growth, if any, in sales volume and price;
- The plaintiff’s operational and financial capacity to meet the sales volume; and
- The incremental expenses applicable to the lost sales.
In this article, we discuss some of the common methodologies used to support assumptions related to the volume of product that would have been sold, but for, the alleged bad act (the “but for sales”), as well as the growth, if any, in assumed but for sales. As discussed more fully below, the methodologies used to support estimates of but for sales and growth need to reflect consideration of the facts and circumstances of the particular matter at hand, and, as such, the methodologies employed by damage experts will likely vary from case to case.
Generally, when estimating but for sales and related growth, experts employ one or more of the following methods:
- The before and after method;
- The yardstick method; and/or
- The terms of the underlying contract.
Under the before and after method, the expert compares the plaintiff’s performance before the alleged bad act to its performance after under the premise that, but for the defendant’s actions, the plaintiff would have experienced the same level of sales and growth in sales that it experience prior to the defendants actions. Application of this method generally works best in situations where the plaintiff has a sufficient operating history (and financial records) to establish a baseline of what could have been expected but for the defendant’s actions. Application of this method should also reflect consideration of how factors other than the defendant’s actions may have affected sales and growth expectations.
Under the yardstick method, the expert identifies proxies that can be used to estimate what sales and growth would have been but for the defendant’s actions. Relevant proxies may include:
- Other operating locations owned by the plaintiff. For example, if the plaintiff is a fast food restaurant franchisee, the relevant proxies may be other restaurant locations owned by the franchisee.
- Similar businesses that are unaffected by the defendant’s action. Continuing with the example above, the relevant proxies may be franchised locations operated by other companies in the franchise network.
- Overall industry averages and other data. Numerous data services exist that provide industry data that may provide relevant proxy information.
- The plaintiff’s projections and budgets, particularly those that are prepared pre-litigation. Projections and budgets can provide a window into what the plaintiff expected but for the defendant’s actions.
As demonstrated in numerous court opinions surrounding challenges to the use of the yardstick method, application does generally require the expert to demonstrate that the yardstick serves as a reasonable proxy for what the plaintiff could have expected but for the defendant’s actions. Also, similar to the before and after method, application of the yardstick method may also require consideration of other factors that might have influenced the plaintiff’s performance vis-a-vis the yardstick chosen.
In certain situations, expected sales and related growth may be best estimated based upon the contract between the plaintiff and the defendant. Some contracts set forth specific purchase requirements expected over the term of the contract, and these requirements can provide a basis for the but for sales and expected growth.
Irrespective of the method used, all assumptions surrounding estimated sales and growth should be evaluated for reasonableness. In doing so, the expert may consider factors such as the plaintiff’s manufacturing and financial capacity, which is the subject of another article in this series.
For more information on this topic, or to learn how Baker Tilly forensic, litigation and valuation advisors can help, contact our team.