By Joey N. Friedman, CPA, ABV, MAcc, MIB — President, Joey Friedman CPA PA. This article is published by Joey Friedman CPA PA, a Florida professional association. All forensic accounting, business valuation, expert witness, and litigation support services described herein are provided by Joey Friedman CPA PA. Mr. Friedman’s professional credentials and experience are exercised in his capacity as an officer, agent, and licensed CPA practicing under and on behalf of Joey Friedman CPA PA.
Quick Answer
Lost profits damages are calculated by determining the “but-for” profits the plaintiff would have earned absent the defendant’s conduct, minus the profits actually earned. The forensic CPA uses one of three methods — before-and-after, yardstick (benchmark), or sales projection — with the method selected based on case facts and data availability. To survive Daubert challenge, lost profits opinions must be based on reasonable certainty, documented methodology, and reliable data — not speculation, conjecture, or unsupported projections.
When a business has been harmed by another party’s wrongful conduct — breach of contract, business interruption, fraud, intellectual property infringement, tortious interference — the resulting financial damage usually comes down to a single question: how much profit would the business have made absent the wrongful conduct?
That question requires lost profits analysis. A forensic CPA serves as the expert witness who quantifies the damages, defends the methodology in deposition and at trial, and helps counsel build (or rebut) the damages case.
This article explains the methodology forensic accountants use to calculate lost profits and the key issues attorneys should expect their expert to address.
What Lost Profits Damages Are
Lost profits damages represent the profits a business would have earned absent the defendant’s wrongful conduct, minus any profits the business actually earned. The calculation:
Lost Profits = (But-For Revenue − But-For Costs) − (Actual Revenue − Actual Costs)
Where:
- “But-For” represents the hypothetical world without the wrongful conduct
- “Actual” represents the real-world performance after the wrongful conduct
- The difference is the loss
The methodology to construct the “but-for” world is where forensic accounting becomes central.
Three Primary Methodologies
1. Before-and-After Method
Compare the business’s performance BEFORE the wrongful conduct to the performance AFTER. The difference represents the lost profits attributable to the conduct.
This method works well when:
- The wrongful conduct has a clear starting date
- The business had stable, documentable performance before the conduct
- Industry conditions before and after are comparable
Limitations: doesn’t account for general industry changes that affect performance regardless of the wrongful conduct.
2. Yardstick Method
Compare the affected business’s performance to a similar “yardstick” business (or industry average) that wasn’t affected by the wrongful conduct. The difference represents the lost profits.
This method works well when:
- A comparable business or industry benchmark exists
- The yardstick is truly comparable (size, geography, market position)
- Industry conditions affecting both businesses are similar
Limitations: finding a true yardstick is difficult for unique businesses; the comparison can be challenged on comparability grounds.
3. Market Share Method
Project the affected business’s market share absent the wrongful conduct, then calculate the lost revenue from the reduced market share. This works well when market data is reliable and the wrongful conduct’s effect on market share is documentable.
The Key Issues in Lost Profits Analysis
Causation
The plaintiff must show that the wrongful conduct CAUSED the lost profits — not just that the business performed worse. Courts evaluate:
- Whether the timing of the loss aligns with the wrongful conduct
- Whether other factors (industry trends, mismanagement, intervening events) could explain the loss
- Whether the loss is plausibly attributable to the conduct
The forensic CPA addresses causation by:
- Documenting the timing relationship
- Analyzing alternative explanations
- Distinguishing wrongful-conduct effects from other factors
Reasonable Certainty
Florida (and federal) law requires lost profits damages be calculated with reasonable certainty — not exact certainty, but a defensible quantitative range. Speculation doesn’t satisfy the standard.
The forensic CPA addresses reasonable certainty by:
- Using documented baseline data
- Applying accepted methodology
- Providing range estimates rather than point estimates where appropriate
- Documenting the basis for every assumption
Mitigation
The plaintiff must take reasonable steps to mitigate damages. If the plaintiff could have reduced the loss but didn’t, the failure to mitigate offsets the recoverable damages.
The forensic CPA addresses mitigation by:
- Analyzing what mitigation was reasonably available
- Calculating mitigation costs (which are themselves recoverable)
- Distinguishing legitimate mitigation efforts from inadequate ones
Foreseeability
Lost profits must have been reasonably foreseeable at the time of the wrongful conduct (or contract formation, for contract claims). Hadley v. Baxendale and its progeny establish this rule.
The forensic CPA addresses foreseeability by:
- Documenting industry knowledge at the relevant time
- Analyzing the parties’ communications about expected performance
- Identifying specific damage categories that were or weren’t foreseeable
The Forecast Component
Most lost profits analyses require forecasting — projecting what the business would have earned. The forecast must be:
- Based on documented data (historical performance, contracts, industry trends)
- Internally consistent
- Defensible under cross-examination
- Adjusted for legitimate factors that would have affected performance regardless of the wrongful conduct
Forensic CPAs typically use:
- Historical regression analysis
- Trend analysis
- Industry benchmark data
- Specific contract or customer evidence
- Forward-looking business plans (where contemporaneous and credible)
Defending the Calculation
Opposing counsel typically challenges lost profits analyses on:
Methodology challenges. “The yardstick isn’t truly comparable.” “The before-and-after period doesn’t account for industry changes.” These require the forensic CPA to document the methodology rigorously and address comparability.
Assumption challenges. “Your 8% growth assumption isn’t supported.” Each significant assumption must have documented basis.
Causation challenges. “The decline was due to market conditions, not our conduct.” The forensic CPA must distinguish the wrongful-conduct effects from other factors.
Mitigation challenges. “The plaintiff didn’t take reasonable steps to reduce damages.” Mitigation analysis must be documented.
Reasonable certainty challenges. “Your damages are too speculative.” Documentation of methodology and supporting data is the defense.
Florida-Specific Considerations
Florida lost profits law is well-developed:
- Established business rule: Florida courts generally require an “established business” with a track record to recover lost profits. New ventures face higher proof burden.
- Mitigation duty: Florida law requires reasonable mitigation efforts.
- Reasonable certainty: Florida requires defensible methodology, not exact certainty.
- Foreseeability: Hadley v. Baxendale applies; Florida courts require foreseeability at the time of breach.
Common Case Types Requiring Lost Profits Analysis
- Breach of contract (commercial disputes)
- Business interruption (hurricane, fire, COVID, other casualties)
- Intellectual property infringement
- Tortious interference with contract or business relationship
- Trade secret misappropriation
- Franchise terminations or breaches
- Construction defects affecting business operations
- Employment-related damages (wrongful termination, restrictive covenant breaches)
Each case type has its own methodology nuances.
Frequently Asked Questions
How long does a lost profits analysis take?
Focused engagements: 4-8 weeks. Complex multi-year, multi-issue analyses: 3-9 months.
How much does it cost?
Typical engagements: $15,000-$75,000 for focused matters. Complex commercial cases: $50,000-$200,000+.
Can lost profits be recovered for a new business?
Yes, but with higher proof burden. “Lost prospective profits” for new ventures require documented business plans, comparable business data, and detailed market analysis.
What records does the forensic CPA need?
3-5+ years of financial statements, tax returns, sales records, customer/contract documentation, industry data, marketing records, and any contemporaneous business plans or projections.
Will the analysis survive Daubert/Frye challenge?
When methodology is well-established (before-and-after, yardstick, market share) and applied with proper documentation, yes. Innovative methodologies are harder to defend.
Does Joey Friedman CPA PA provide lost profits expert witness services?
Yes. The firm regularly serves as expert witness in Florida federal and state court matters involving lost profits, business interruption, and other economic damages.
What credentials does the expert need?
CPA + ABV (Accredited in Business Valuation) is the strongest combination for lost profits work. CVA is also accepted. Specific recent testimony experience is highly relevant.
Working with a Forensic CPA on Lost Profits Cases
If you are an attorney handling a Florida commercial damages case involving lost profits — breach of contract, business interruption, tortious interference, IP, or other commercial torts — engaging a credentialed forensic CPA early is essential. The methodology selection, records collection, and analytical depth all benefit from being planned at the start.
Joey Friedman CPA PA, through its President Joey N. Friedman, CPA, ABV, MAcc, MIB, provides lost profits expert witness services for Florida federal and state court matters. Contact the firm to discuss your specific case.
About Joey Friedman CPA PA
Joey Friedman CPA PA is a Florida professional association providing forensic accounting, business valuation, expert witness, and litigation support services. The firm is led by Joey N. Friedman, CPA, ABV, MAcc, MIB, who serves as the firm’s President.
All services described in this article are provided by Joey Friedman CPA PA. Engagement letters and professional services are issued by the firm. Joey N. Friedman signs in his capacity as the firm’s President — as an officer and agent acting on behalf of Joey Friedman CPA PA, not in any personal or individual capacity. Mr. Friedman’s professional credentials — including CPA license, ABV (Accredited in Business Valuation, AICPA), and ACFE membership — are exercised under the firm.
To engage Joey Friedman CPA PA, contact the firm:
- Phone: 954-282-9615
- Contact form: Contact the Firm
Disclaimer: This article is for informational purposes only and does not constitute legal, accounting, or tax advice. Engagement of Joey Friedman CPA PA is subject to a written engagement letter executed between Joey Friedman CPA PA and the engaging party. No attorney-client or accountant-client relationship is created by reading this article.
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About This Service
This article is part of Joey Friedman CPA PA’s broader practice in expert witness and litigation support services. Visit the main service page for a complete overview of how we support attorneys, businesses, and individuals across Florida and nationally in financial disputes, litigation, and forensic engagements.