Executive Summary
Economic damages are the monetary measure intended to make an injured party financially whole after a commercial wrong. In commercial litigation, damages analyses often determine the settlement range, inform motion practice, and shape trial strategy—because the numbers must be tied to the record and computed with reasonable certainty.
Most commercial damages disputes center on either (1) lost profits over a defined period, or (2) diminished business value when the harm is long‑lasting or effectively permanent. Regardless of the theory, a defensible damages opinion typically requires a clear causation framework, a “but‑for” benchmark, and a transparent calculation that can be traced back to source documents.
CPAs with forensic accounting and valuation experience frequently support counsel by verifying the underlying accounting records, separating operating results from one‑off or owner‑specific items, and applying accepted methods in a way that is consistent with the facts of the case.
When This Issue Arises
Economic damage calculations commonly arise when a dispute alleges that one party’s actions caused quantifiable financial harm. Typical triggers include:
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Breach of contract (termination of supply, distribution, service, or licensing agreements).
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Business tort claims (misappropriation, interference, unfair competition, or similar allegations).
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Fraud, financial misrepresentation, and theft schemes impacting cash flow or asset values.
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Employment disputes involving compensation, commissions, or wrongful termination damages.
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Shareholder, member, or partner disputes involving diversion of funds or dilution of economic rights.
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Catastrophic events or operational disruptions tied to alleged negligence or coverage disputes.
Timing matters. Engaging a damages expert early often improves the discovery plan (what to request and why), reduces avoidable rework, and helps the legal team pressure‑test damages theories before positions harden.
Accepted Methods / Frameworks
Courts and litigants generally expect damages opinions to follow an accepted framework: define the harm period, establish the but‑for benchmark, isolate the defendant‑caused portion of the change, account for mitigation, and discount future amounts to present value when required.
Commonly used methods include:
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Before‑and‑after method: compares performance before the alleged harm to performance after the event, adjusting for other factors that could affect results.
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Yardstick (benchmark) method: uses comparable companies, locations, product lines, or industry data as the proxy for but‑for performance when the plaintiff’s own history is not sufficient.
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Market model method: uses broader market or industry movement to separate general conditions from defendant‑specific harm (often used when market data is robust).
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Diminution in business value: estimates the difference between business value with the alleged harm and business value absent the harm, using accepted valuation approaches and a clear “known or knowable” framework where applicable.
Damages experts also must be consistent in tax treatment and discounting. Lost profits are often presented on a pre‑tax basis (because awards are typically taxable to recipients), while business value analyses generally use after‑tax cash flows. Mixing pre‑tax cash flows with after‑tax discount rates (or vice versa) is a common and avoidable error.
Numeric example (illustrative): present value of lost profits from a contract breach
Assume a contract would have produced $500,000 of annual revenue for Years 1–3, with incremental variable costs of 60% of revenue and incremental fixed costs of $50,000 per year. The contract was wrongfully terminated, and the plaintiff seeks lost profits for Years 1–3. Use a 12% discount rate.
| Year | Lost profit | Present value (12%) |
|---|---|---|
| 1 | $150,000 | $133,929 |
| 2 | $150,000 | $119,579 |
| 3 | $150,000 | $106,767 |
Total present value of lost profits ≈ $360,275. The defensibility of this number depends on whether the revenue, cost structure, harm period, mitigation, and discount rate are supported by the record and consistent with the chosen framework.
Documents & Data Checklist
Economic damages opinions rise or fall on documentation. Commonly needed items include:
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Financial statements (3–5 years) and year‑to‑date results, with consistent classifications over time.
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Business tax returns for the same period (including all schedules) to corroborate reported income and entity structure.
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General ledger detail, trial balances, and journal entry support for key accounts (owner compensation, discretionary expenses, unusual adjustments).
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Bank statements and merchant processing records to validate cash receipts and identify unrecorded revenue or diversion.
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Customer contracts, pricing schedules, purchase orders, invoices, credit memos, and cancellation/termination correspondence.
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Cost support: vendor invoices, payroll registers, staffing plans, and documentation that distinguishes fixed vs. variable costs.
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Budgets, forecasts, and budget‑to‑actual reports.
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Operational data (units sold, capacity constraints, churn, backlog/pipeline, utilization) that ties economic performance to reality.
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Mitigation evidence: substitute contracts, alternate vendors/customers, replacement revenue, and steps taken to reduce loss.
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Industry and market benchmark data used to test reasonableness (growth, margins, pricing, and market share).
Common Pitfalls + Rebuttal Strategies
Opposing experts and counsel frequently challenge damages opinions using the same set of pressure points. Common pitfalls—and practical rebuttal strategies—include:
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Causation gaps: assuming all decline is defendant‑caused without ruling out other drivers (competition, macro conditions, internal issues). Rebuttal: isolate drivers with contemporaneous records and benchmark comparisons; quantify non‑defendant factors where appropriate.
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Lost revenue vs. lost profits confusion: claiming revenue losses without analyzing incremental costs. Rebuttal: compute incremental profit, not gross revenue, and document variable vs. fixed cost behavior.
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Speculative assumptions: using optimistic growth, margins, or market share without support. Rebuttal: tie assumptions to historical performance, contracts, capacity, and industry data; run sensitivities to show what drives results.
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Mitigation ignored or minimized: failing to address reasonable steps the plaintiff could take. Rebuttal: document mitigation efforts and quantify offsets (replacement revenue, cost reductions, substitute contracts).
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Double counting: mixing a business‑value claim with a lost‑profits claim over the same harm period without a clear bridge. Rebuttal: map the timeline and show which dollars are counted once (value) versus separately (period losses), consistent with the claim theory.
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Discount rate and tax mismatches: applying after‑tax rates to pre‑tax profits (or vice versa). Rebuttal: keep the tax basis consistent throughout and document the discount rate rationale.
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Weak traceability: calculations that cannot be tied back to the source data. Rebuttal: maintain schedules that reconcile inputs to the ledger, tax returns, banking, and contracts, and show the arithmetic step‑by‑step.
FAQ
What are economic damages in commercial litigation?
Economic damages are measurable financial losses attributable to the alleged conduct—typically lost profits, extra costs, or diminished business value—computed using accepted methods and supported by evidence.
What is the difference between lost revenue and lost profits?
Lost revenue is a top‑line reduction. Lost profits reflect the net impact after subtracting incremental costs associated with that revenue, which is usually the measure courts focus on.
When is diminished business value used instead of lost profits?
Diminished value is often used when the harm is long‑lasting or permanent (for example, destruction of a business line) and a value‑based measure better captures the full economic impact than a limited period of lost profits.
What does “reasonable certainty” mean for damages calculations?
It generally means the calculation is grounded in sufficient relevant data and reliable methods—not guesswork—and that key assumptions are supported by documents and observable facts.
How is mitigation handled in damages calculations?
Mitigation evaluates whether the plaintiff took reasonable steps to reduce losses. Replacement revenue, substitute contracts, cost reductions, and other offsets are typically considered in the final damages measure.
Who is typically qualified to calculate economic damages?
Damages experts commonly include CPAs with forensic and valuation experience and/or economists with litigation experience. In cases driven by accounting records, normalization adjustments, and financial tracing, a CPA with valuation and forensic expertise is often a strong fit.
Sources
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Federal Rule of Evidence 702 (expert testimony reliability).
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AICPA — Statement on Standards for Forensic Services (SSFS No. 1).
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AICPA — Statement on Standards for Valuation Services (VS Section 100 / SSVS).
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International Glossary of Business Valuation Terms (definitions used across valuation practice).
CTA + Disclaimer
Contact the team at Joey Friedman CPA PA to discuss your economic damages needs.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Outcomes depend on specific facts and circumstances.
