Lost profits apply when the business survives and recovers over a loss period; business valuation applies when it is destroyed or the interest is taken.
The profits a continuing business would have earned but for the wrongful act, measured over a defined loss period, net of avoided costs and mitigation, and discounted to present value.
The value of the business interest as a whole at a valuation date, applied when the business was destroyed or the interest was taken, measured under a stated standard of value using the income, market, and asset approaches.
| Dimension | Lost Profits | Business Valuation |
|---|---|---|
| When it applies | The business survives and recovers | The business is destroyed or the interest is taken |
| Time frame | A loss period from the act to recovery | A single valuation date |
| What is measured | The difference in profits over the period | The value of all expected future cash flows |
| Risk treatment | Discount rate applied to projected profits | Discount or capitalization rate within the income approach |
| Governing standard | Reasonable certainty of the fact of loss | The standard of value the framework specifies |
Use lost profits when the business continued to operate and the harm was an interruption: a breached supply contract, a lost customer, a period of closure, or a diverted opportunity. The loss period ends when the business recovered or would have recovered, and the measure is profits, not revenue.
Use business valuation when the harm ended the business or removed the owner's interest: a company forced to close, a partner squeezed out, a franchise terminated, or a marital interest to be divided. The measure is what the interest was worth on the valuation date under the standard of value the governing framework requires.
Both measures rest on projected cash flows and both discount them for time and risk. The danger is double recovery: a business valued as of the date of destruction already incorporates the profits it would have earned afterward, so claiming both lost profits after that date and the lost value of the business counts the same cash flows twice. Where a business was harmed for a period and then destroyed, the analysis presents lost profits through the date of destruction and the value of the business as of that date, with the boundary stated. The lost profits versus lost business value guide works through the choice.
Only for different periods. Lost profits can run from the wrongful act to the date the business was destroyed, and the business can be valued as of that date, but lost profits after the valuation date are already inside the value and cannot be added again.
Neither is inherently larger. A short interruption of a valuable business produces small lost profits and no change in value; the destruction of a marginal business produces a small value and, had it survived, small profits. The facts, not the label, drive the number.
Both use a rate that reflects the risk of the cash flows. In a valuation the rate is built up from the company's risk profile within the income approach; in a lost profits analysis the rate reflects the risk of the specific projected profits, which can be lower where the profits were contractually assured.
Request a consultation on Lost Profits vs. Business Valuation or call (201) 343-0700. Plaintiff and defense counsel.