Lost profits measure what a continuing business would have earned but for the wrongful act over a defined loss period. Lost business value measures what the business or the owner's interest was worth on a valuation date when the act destroyed it. Both rest on projected cash flows, so claiming both for the same period counts the loss twice. This guide explains when each measure applies, where the boundary lies, and how the proof and the discounting differ.
A business harmed by a breach, a tort, or a fraud can lose profits for a period and then recover, or it can be destroyed. The first harm is measured as lost profits: the difference between the profits the business would have earned and the profits it did earn, over a loss period, net of avoided costs and mitigation. The second is measured as lost business value: what the business was worth on the date it was destroyed, developed through a valuation under the standard of value the framework requires. The measures answer different questions, and the choice depends on what happened to the business.
Lost profits apply when the business continued to operate through the harm. A breached supply contract, a lost customer, a period of closure, a diverted opportunity, or a defective input that disrupted production produces a loss with a beginning and an end. The but-for analysis establishes what revenue the business would have earned, deducts the costs it avoided, nets what it earned by mitigating, tests causation against the other events of the period, and discounts any future portion. The loss period ends when the business recovered or would have recovered, which may be the remaining term of a contract or the time needed to rebuild a customer base.
Business value applies when the harm ended the business or removed the owner's interest: a company forced to close, a franchise terminated, a partner frozen out, or an owner whose interest was taken. The measure is the value of the business or the interest as of the date of destruction, which already reflects the profits the business would have earned afterward, developed through the income, market, and asset approaches and adjusted for the standard of value and the interest. A lost profits projection running indefinitely is usually a business valuation in disguise and is better presented as one.
Because a valuation as of the date of destruction incorporates all future profits, adding lost profits after that date counts the same cash flows twice. Where a business was harmed for a period and then destroyed, the analysis presents lost profits from the wrongful act to the date of destruction and the value of the business as of that date, with the boundary stated and the two schedules reconciled. The lost profits versus business valuation comparison sets out the distinction side by side.
Most jurisdictions require the fact of a lost profits loss to be proved with reasonable certainty, with more latitude on the amount once the fact is shown. An established business proves the fact from its history; a new business faces a higher bar and proves it from signed contracts, comparable businesses, or pre-dispute performance. A valuation is proved by following the professional standards and grounding the projections in the company's history and market, as the business valuation in litigation guide describes. In both cases the report shows the basis for each projection so the trier of fact can weigh it.
Both measures discount future cash flows for time and risk, but the rate is built differently. In a valuation the rate is developed within the income approach from the company's risk profile and applied to all expected cash flows. 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 and higher where they depended on winning new business. The present value method page explains the mechanics common to both.
The measure follows the facts: whether the business survived or was destroyed. Where the facts are contested, the report can present both measures with the boundary stated, but they cannot be combined for the same period.
The sale price is evidence of value as of the sale date, and the analysis considers whether the harm reduced it. Lost profits may run from the harm to the sale, with the reduction in sale price as the measure of the loss after that.
Possibly, if it can be valued with reasonable certainty from evidence such as investment rounds, comparable transactions, or contracts in hand. The analysis is demanding, and the report addresses the risks the business faced directly.
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