Client Success Stories
$1 Million Compensation for Future Damages to a Business
The Challenge
Our client was an expensive sporting goods manufacturer who sold and serviced their products through a dealer network with extensive training and repair capabilities. When a large discount store chain attempted to buy the product, our client refused, and the chain used deceptive tactics to divert the products to its stores. The scheme caused our client considerable trouble: they had to buy back their own products at the chain’s retail price and mollify their disgruntled dealers, who were upset at having a discount chain compete with them at significantly lower prices.
Our client sued the chain and engaged AVGI to calculate business damages. We now had to overcome several hurdles:
- The valuation standard for business damages is Discounted Lost Profits-displaying how the company lost profits due to the tort. However, the opposing expert’s long, detailed report showed that the company’s sales and profits rose in the 1.5 years following the tort, making it difficult to establish business damages and seek compensation.
- The legal standard demanded evidence of at least a 51% probability that our client’s business was riskier after the tort than before.
- Finally, the increase in risk had to be quantified and translated into a specific future damages amount.
The Solution
AVGI’s experts identified elevated business risk leading to a loss of value as the primary damage measurement in our analysis rather than the standard Discounted Lost Profits.
Because our client’s profits had increased following the tort, the classical way would have poorly represented the actual business damage they had incurred.
Instead, using compelling historical precedents, AVGI’s expert witness provided hard evidence of the potentially devastating cumulative effect of major adverse events. Although an initial adverse event may only weaken a company without dampening its current profits, the initial event may cause a subsequent adverse event to be serious or even fatal. Thus, while the tort merely rankled the dealer network without affecting sales and profits, it nonetheless weakened our client, increasing the probability that a future adverse event will cause sales and profitability to decline, resulting in lower long-term expected profits, regardless of the present situation.
We likened the tort to a low-impact collision while driving a new car on a test drive. The body shop may not detect structural damage, yet a dealer may have to sell the car at a discount to entice a buyer who demands a brand-new car with a pristine collision record.
AVGI experts then developed a plausible probabilistic risk model that supported an increase in the applicable discount rate of at least 1% that was simple and easily understood by judge and jury members alike.
AVGI quantified the elevated risks that led to future damages of $1 million, a small percentage of the client’s pre-tort fair market value. The small percentage demonstrated that the damages and compensation we were seeking were reasonable.
The Result we get
AVGI’s expert witness proved crucial to the case, and our client settled successfully out-of-court. In addition, the client’s retaining counsel remarked that he looks forward to his next opportunity to work with us!
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We’ve compiled a list of the most common questions our customers ask. If you can’t find the answer you’re looking for here, please don’t hesitate to contact our customer support team, and we’ll be happy to assist you.
A business evaluation is not necessarily the same as a business valuation. Business evaluation is a much broader term that can refer to auditing any aspect of a business, such as business processes, phone systems, or overall efficiency, but does not explicitly refer to evaluating the monetary value of the business.
In contrast, business valuation refers exclusively to establishing the firm’s monetary value. Colloquially, people often use the two terms interchangeably, so someone looking for a business valuation may search online for business evaluation services.
When your business is already in transition – either through a planned sale, takeover, merger, transfer, or bequest of a business entity – it is often too late to make strategic changes to influence the business or increase its value. Value enhancement, therefore, must begin some time before so the business growth consultant can value your business and suggest value enhancement opportunities. AVGI suggests connecting with a business growth consultant at least 2 years before selling a business.
Key value drivers are the aspects of a business that drive its success and profitability. Some value driver examples include the customer base, the skilled staff, or the business’s technology. A business consultant identifies drivers by looking at financial statements and asking, “What drives productivity here?” and what factors drive those drivers. The base drivers of a business are the capital and operational factors. The business consultant examines the effect of changes in each driver on the overall value of the business. This important step enables the consultant to determine and reexamine management priorities. A business growth consultation with a valuation expert enables the business owner to understand what the future business landscape may look like through various calculations, which helps make a decision about managerial priorities to chart a path to increase business value.
To increase the value of your business until you sell it, you must formulate a plan of action that will maximize its sales price. Part of this plan will be identifying factors that might be pulling down the value of your business, and reducing their effect as far as possible. Another part of the strategy will be identifying opportunities to increase its value and pursue them energetically. Examples of draining factors might be concentrating sales to a limited number of customers, debt, and relying heavily on key individuals to keep the business running. Factors that could increase the value of a business often include goodwill, intellectual property, and having excellent customer relationships.
Obviously, it is important to track how effective each strategy is in increasing the value of your business, especially since you will need this information when demonstrating the marketability of your business to prospective buyers.
When the owner of a business prioritizes activities that will increase profitability, security, and business growth, and so on, the business becomes appealing to an investor (or, potentially, a buyer). It is easier for a business to grow, such as by increasing the number of stores, healthcare facilities, restaurants, or some other assets, when the business demonstrates active value driving. It will be easier to get a loan, and people will be more willing to listen to your ideas. The value of a business is determined by business valuation, which considers key value drivers and business growth plans. If you want your business to grow, you must focus on value driving.
Different types of businesses can expect results from a business growth strategy after different amounts of time. Some businesses need a 5-year business growth plan; however, other businesses expect to see some return on investment after as little as 6 months. True value enhancement in a business often requires long-term campaigns that must run for some time to demonstrate results that can withstand buyer or investor scrutiny. An effective business growth strategy will consider typical sales cycles for that product type and whether the business markets a high-end product, as these take longer to show accurate results.
Some businesses hire a business growth coach who will help put a business growth plan in place and remain connected, to support business growth until there are reliable, powerful results.