Business Loss 301:
Quantifying Future Business Loss

Future loss of profit means the losses that will continue to occur after the compensation hearing. It is a more speculative exercise as it involves more assumptions than the past loss quantification requires.

The first assumption to be made is how far into the future will the losses be allowed for compensation?  This assumption must be supported by evidence. For example, was the owner of the business planning to close it and retire in 5 years past the date of the compensation hearing?  If so, the future losses will most likely be allowed for 5 years. If the plan was for the business to continue indefinitely, the landowner must prove that it was sustainable on an ongoing basis. These are evidentiary issues to be dealt with by the landowner.

The second assumption to be made is how profitable the business would have been on an ongoing basis.  Was the business operating in an increasing market or a declining market? Was there likely to be strong competition in the foreseeable future?  These are examples of factors that the expert must consider when projecting future loss for compensation.

The methodology, in very simple terms (as we are expropriation lawyers and not CBVs) is as follows: the expert arrives at the number of years for the future loss period. He or she then assumes a level of annual profitability and calculates the gross amount of profit that will be lost over the period. The expert then applies a “discount rate” which is a multiplier that acts to reduce the gross number on the following bases: 1) it accounts for the time-value of money ($100 in the hand today is worth more to the landowner than $10 per year for 10 years); 2) it accounts for the possibility that the business might not have survived for the entire assumed period; 3) it accounts for the possibility that the business might not have been as profitable as projected (a built in negative contingency; and 4) it accounts for other industry-specific risk.

The expert then applies the discount rate and calculates the future loss of profit. Because this quantification is speculative, the landowner makes his or her claim stronger by leading evidence that strengthens, or tends to strengthen, the assumptions relied upon by the expert. The judge or tribunal members are entitled to follow either the landowner’s or authority’s expert report or reject them both and arrive at a business loss quantification based on the other evidence before him or her.

Interest is not payable on a future loss of profit award because the loss has not yet occurred as of the date of the compensation hearing. 

If you have questions or would like to discuss this topic further, please contact Robert Pineo.

Please note that this article is meant to provide information only and is not intended to confer legal advice or opinion. If you have any further questions please consult a lawyer. Please note as well that many of the statements are general principles which may vary on a case by case basis.