|
In the 1980s, a warehousing and
trucking company was founded. Eventually the business consisted of
multiple warehouse locations with millions of square footage,
transportation equipment, and relationships with major national retail
businesses. In the mid-1990s, and for the next 15 years, evolving
technological advances and retail trends heightened the need for, and
success of, inventory logistics companies. The company capitalized on
those opportunities and relationships. Amid expansion and ongoing success,
the owner and CEO of the business suffered personal tragedies including
a "mystery" debilitating illness that eventually resulted in
his inability to do work of any kind. As a result, the business slowly
- and then rapidly - declined. It eventually closed. Eventually,
medical advances and testing resulted in the "mystery
illness" being identified and causation explained. It was
determined that the cause of the illness was chemical poisoning from
groundwater in the location where the corporate headquarters had been
located.
Arxis Involvement
As can be expected, the newfound understanding and explanation of a
debilitating disease that created a dramatic change in business
fortunes and life circumstances for the owner (and others) resulted in
a desire to be compensated for those losses. The plaintiff went from a
vigorous and successful businessman to someone who was largely unable
to work and overseeing the diminishment and loss of his business and
income. The impact on his personal life was even more dramatic. A
lawsuit was filed against the landlord, and others, seeking
remuneration for substantial losses. Once the lawsuit was filed,
Plaintiff's attorneys contacted Arxis to prepare an expert opinion
regarding the loss of profits from the business, should a jury find
that the defendants were liable.
Challenges
When calculating lost profits, the formula is fairly simple: what
profits would have been but for the damage event minus actual
historical profits. Typically, the difficult part of that formula is
establishing a reasonable projection of what earned profits would have
been had the damage event not occurred. That was certainly difficult in
this case, but finding 30-year-old business records to establish
historical earned income was nearly impossible. Without those records,
or a reasonable basis for estimating what actual profits and losses
were, there was no way to quantify lost net income. Nobody, it seems,
keeps financial records for 30-plus years. In this case, the personal
life circumstances and passage of time made the process of locating records
extraordinarily difficult.
The solution was to use the records
we could find as a basis for filling in the gaps where no records
existed. In this case, an audited financial statement for the business
was located that was prepared over 30 years ago. That was a great
discovery as there was potential that the CPA firm may have prepared
similar reporting for subsequent years. Unfortunately, we found the
firm was disbanded 20 years ago and no additional independent financial
reporting was available. However, a financial statement prepared by an
independent CPA firm, even if only for one year, was very authoritative
and helpful. Additionally, tax returns were located covering several
years as the business was clearly declining and terminated. After
gathering what we could, there were about 20 years for which we had no
historical financial reporting.
Arxis Conclusions
The key metric that was used to project financial results was warehouse
square footage. Based on the records we had, reliable and consistent
metrics (e.g. revenue per square foot, net income per square foot,
etc.) were developed. The client was asked to provide records and
estimates related to leased square footage for the entire period of the
loss calculation (about 35 years). Based on those records (leases,
etc.) and estimates, the projections were prepared as if square footage
remained at levels of 30 years ago; the projections did not include any
growth in the business from increased square footage. Based on this,
and other assumptions, the projected lost net income was likely very
conservative but would seem to be a reasonable basis of projection for
the jury.
Results
The case went to trial, and a jury heard extensive medical evidence
related to liability and financial damage evidence. Unfortunately for
the Plaintiff, the verdict indicated the jury did not accept that the
defendants bore any liability. Therefore, all the work calculating lost
income and providing testimony about economic damage was not utilized
by the jury in their deliberations (i.e., if there is no liability,
there are no damages). This is not an unusual result and is one of the
risks plaintiffs and their counsel consider when retaining a damages
expert; in this case, it was considered prudent for the case
development to understand the potential damages before pursuing further
litigation. From an expert's perspective, the circumstances of gathering
data and building a loss calculation in this matter were quite unique
and challenging; we were confident in our approach and resulting
calculations, so it would have been interesting to see the actual
economic damages awarded had the jury agreed with the Plaintiff's
liability premise.
|
|
Forensic accounting, by its nature,
involves actual or anticipated disputes or litigation. Arxis Financial's
forensic business valuations provide clients with a comprehensible
appraisal that carefully considers critical factors in the litigation
context.
The specialists in Arxis Financial's
"Forensic
Accounting" practice have extensive experience in
presenting and defending our findings in litigation proceedings,
including depositions and trial at local, state and federal court
levels, as well as mediation and arbitration. We assist attorneys in
interpreting the valuation, and help counsel to understand and analyze
events or issues. This level of support can be a key asset in
determining a legal strategy as well as reaching a reasonable and
efficient conclusion.
Our clients benefit from having
valuation professionals who understand the realities of market
valuations much better than the purely theoretical practitioners,
resulting in very defensible and clear valuations. A key reason that
attorneys engage Arxis
Financial is our ability to analyze, explain and
present financially complex valuation issues, which is an important
asset in determining a legal strategy as well as achieving your
client's goals. Our experts are well-known in the industry and highly
respected for their depth of knowledge and resources.
If you have any questions about Forensic Accounting Services for
Business Valuation, please feel free to contact
us.
|
