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A Prompt Damages Analysis Can Help Maximize the Final Results in the Case

by Andrew C. Hall on Categories: damages

A Prompt Damages Analysis Can Help Maximize the Final Results in the Case
By Andrew C. Hall

It is always interesting to see the focus of litigation shift from liability to damages. When lawyers accept a case, they evaluate the facts and law related to liability, defenses, and causation. The lawyers may have a general idea on how much the case is worth based upon their client’s assessment or based on their prior experience. That ends the concentrated damage analysis until a trial date is approaching after extensive discovery takes place. Then, a forensic witness is engaged to assess the damages.

However, deferring a damage analysis may result in missed opportunities to obtain the best and most accurate evidence of damages and maximize the final result. Further, the consequence of this deferral may result in the expert, once retained, being forced to compute damages only on the limited information already developed, and that information may be incomplete or inadequate.
I believe that assessment of damage elements and identification of how to prove the amount of damages must be considered from the first client interview. Discovery must be shaped to maximize the ultimate damage presentation. In this context, the lawyer must be an equal partner with the damage expert(s) in focusing upon a damage model based on valuation or lost profit and developing the case on that model.

To achieve this result, a lawyer should obtain a basic degree of familiarity regarding the business of the client and the methods used in the client’s industry to value businesses for sale. For example, in a business failure, we typically consider how much the business should have been worth before the events occurred that are outlined in the complaint. In taking this approach, we consider comparable sales or the capitalization of profits, among other approaches. At the same time we often fail to consider the breakup value of a business, which, in many instances, can exceed the value of the whole business under the more traditional valuation models.

For example, an established business may be in a decline. Therefore, valuation based on a multiple of its earnings may significantly understate the value of that business to others. That same business may have unique assets that would enhance the value of the income stream. For example, it may have an established and accepted brand name. The value of that name and related damages could exceed the capitalized value of the actual earnings, assuming the company were to sell or license its trade name and separately dispose of its tangible assets. The royalties from an accepted brand would yield a long-term income stream with a small amount of expenses to administer the same. The value of that incoming stream coupled with the proceeds from the sale of the tangible assets could easily exceed the traditional value achieved solely from reliance upon a multiple of EBIDA or net earnings.

Some industries have unique value model standards. For example, in technology-related businesses, it is not unusual for the value of a business not yet profitable to be based upon the cost to build the technology platform or to reproduce the technology and the effect this technology may have, once acquired, on the earnings of the acquiring company.
Another possible factor arises when there is an industry consolidation in effect. Often valuation is based upon a projection of the seller’s earnings in the next year (accepting one year of anticipated growth), and then adjusting or eliminating all expenses that would be attributed to owner’s compensation or for services that already exist in the buyer’s business organization. The net earnings reflected by this calculation would be multiplied by a price earnings multiple of the purchaser, particularly if it is a public company, to yield significantly higher values than traditional valuations based upon net monies capitalized.
These same valuation issues are presented to a family lawyer in the context of dissolution of marriage. Often the family lawyer is attuned to traditional marital issues and is unfamiliar with business valuation. However, because of the importance of equitable distribution, particularly in a high net worth case, these same principles should be understood and employed by the family law practitioner.

Finally, I am sure that a number of my colleagues will believe that because they became lawyers, (and not business experts) that these issues can be boring, and it is sufficient to rely on accountants to value the businesses at issue, particularly in dissolution cases. However, accountants welcome the chance to shine and expand their damage analysis if given the chance. Too often that effort is foreclosed because the lawyer simply does not understand the differences in the valuation approaches.

Many years ago I was in an hotly contested contested dispute between the owners of a large healthcare company. One owner believed the value of the company was $25,000,000. The other thought this sum was excessive. They could not agree upon value and therefore could not agree on a buyout. They fought until the damage issues were being developed. We hired investment bankers who valued the company at just under $300 million. The fighting stopped, the company was sold by the investment bankers for the value they computed and both partners continued their lives far wealthier than they had ever envisioned.

Andrew C. Hall is the founder and managing partner of Hall, Lamb and Hall, P.A., a Miami-based law firm specializing in complex corporate, business, and securities litigation. Hall can be reached at 2665 S. Bayshore Dr., PH 1 Miami, FL 33133 (305) 374-5030

South Florida Legal Guide Midyear 2014 Edition

Tags: damages liability

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