How To Calculate Lost Profits for New Businesses: New Business Damages
Video Transcript
Lost Profits for New Businesses
How is it possible to calculate damages or lost profits for a business with no financial history on which to base projections?
How is it possible to have reasonable certainty of damages when you have a very short operating history for the business?
Historical reviews are based on the New Business Rule, which has evolved to allow us to calculate lost profits on the newly started business.
The New Business Rule provides that unestablished businesses cannot recover lost profits absent a history of past profits; future profits are too uncertain, contingent, and speculative.
What was once considered the law has been converted into a rule of evidence. If you meet certain criteria, you can prove or at least have reasonable certainty that lost profits exist.
Two methodologies that we have used to successfully calculate lost profits on start-up businesses:
- The Cost-to-Duplicate Method- This method calculates how much it would cost to start another company with the same intangible assets from scratch. This includes costs like technology development, recruiting skilled teams, purchasing necessary equipment, and securing initial patents.
- The Bonavito Method- Robert Bonavito, an expert in valuing early-stage startup businesses, has developed a method that addresses the uncertainty of the financial forecast. Our method assigns value to a startup based on quantitative assessment in five key areas: basic value, technology, execution, strategic relationships, and product rollout or sale success. Each location can add a specific dollar amount value, which is particularly useful when financial data is scarce or unreliable.
The following characteristics demonstrate that a company may have lost profits:
- A product or products that have demonstrated success
- An established place in the market
- Demonstrated history of revenues
- Some level of profitability or positive cash flows
- An established, trained, and competent workforce
- A reliable supply chain for any new work materials, component parts, or supplies
- A solid base of existing customers or likely future customers
- An established business model
- A credible management team
- Adequate sources of working in investment capital
Stages of development of a company:
- Stage I, enterprise has no product revenue and a limited expense history
- Stage II, the enterprise has no product revenue but substantial expenses
- Stage III, enterprise has made significant progress in product development
- Stage IV, enterprises met additional key development milestones and have some product revenue but are still operating at a loss
- Stage V, enterprises product revenue and has received some measure of financial success
- Stage VI: enterprise has an established financial history of profitability