Lost Profits

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Lost profits

Lost profits are economic damages caused by a disruption in business operations. The damages can be the result of a variety of factors, some of which include patent infringement, breach of contract, liability caused by an accident, negligent acts or physical damage to business property or equipment.

The need to quantify economic damages for the purposes of determining lost profits with reasonable certainty is a necessity for any case that seeks retribution against an offending party.

Loss Period

Lost revenues are typically calculated from the date when the defendant’s actions first impact the performance of the plaintiff’s business (“the incident”) to a specified date following the incident. This post-incident date can be based on the time period required for the plaintiff’s projected operating performance to return to a level it would have achieved but-for the defendant’s actions. This date can also be based on other factors such as the terms of a particular contract.

Calculation

Lost profit calculations do not typically include fixed gross profit expenses because lost profits are generally considered lost net profits, which are determined by subtracting the avoided costs (incremental expenses) from the estimated lost gross revenue.Fixed expenses, such as rent and salaries, are often not deducted because they are incurred regardless of the business activity that was lost. 

Key Aspects of Lost Profit Calculations

    • Net Profits, Not Gross:

Courts and legal professionals usually focus on recovering lost net profits rather than gross profits or just lost revenue. 

    • Estimating Lost Revenue:

The first step is to estimate the gross revenue that would have been generated had the wrongful act not occurred. 

    • Subtracting Avoided Costs:

You then deduct the incremental costs that would have been incurred to produce that lost revenue. These are known as “saved” or “avoided” costs, such as the direct cost of goods sold and sales commissions. 

    • Excluding Fixed Overhead:

Fixed expenses, like rent, insurance, and salaries, are generally not deducted. These are expenses that the business would have incurred even if the wrongful act hadn’t happened. 

    • Focus on Direct Expenses:

The calculation centers on expenses directly related to the lost sales or services. 

Why Gross Profit Expenses Are Not Deducted

Overstatement of Damages:

Including all gross expenses would overstate the damages because it fails to account for fixed costs that the business did not save. 

Principle of Damages:

The goal of lost profit damages is to put the plaintiff back in the position they would have been in had the wrongful act not occurred. This means accounting for the profit they would have made, not just the revenue before fixed overhead. 

In summary, lost profit is calculated by taking estimated lost gross revenue and subtracting only the incremental costs directly associated with generating that revenue, not the business’s fixed overhead expenses. 

Discount rate

When lost profits are in the future, say after the trial is scheduled, a discount rate is used to express the loss as a present value. As the saying goes, a dollar today is worth more than a dollar tomorrow. The discount rate in commercial cases is chosen to reflect the riskiness of a company’s future cash flows. As a result, the discount rate is higher than the risk-free rates typically used in personal injury and wrongful death cases.

Misconceptions & conclusions

1. One misconception is that businesses that have losses can’t claim lost profits. This is incorrect because the claimed damages simply adjust the amount of loss.                                                                                                                                                                                                                                    2.New businesses can’t claim losses-this is also incorrect. If the losses are reasonable/can be justified they can be claimed, as newer cases show.                                                                                                                                                                                                                                                                             3. All reductions in revenue may not be related to the breach/injury. This issue needs to be examined.


Lost profits are economic damages caused by a disruption in business operations — patent infringement, breach of contract, business interruption, negligent acts, or physical damage to property. In California, you must prove lost profits with reasonable certainty under CACI 3903, not speculation.

I calculate lost profits as a CPA, CVA, CFE, Esq. who has been CFO of 6 public boards and expert in 150+ cases. Every dollar links to Bates-stamped source.

Loss Period

Lost revenues are calculated from the date defendant’s actions first impact performance (the incident) to the date plaintiff’s performance would have returned to the level it would have achieved but-for defendant’s actions. This can be based on contract term, time to find replacement supplier, or time to rebuild customer base.

Calculation — My Method That Survives Sargon

Lost profits are lost net profits, not gross revenue.

Formula:
Lost Revenue (but-for) — Avoided Costs (variable) — Mitigation = Lost Profits + Prejudgment Interest

  1. Estimating Lost Revenue (But-For):
    Based on historical trend (12-36 months pre-incident), existing contracts, or yardstick method (comparable company). I do not rely on plaintiff’s projection alone. I verify via bank deposits, POS, sales tax filings — three-way match.
  2. Subtracting Avoided Costs:
    Incremental costs saved because business didn’t operate: COGS, direct labor, sales commissions, merchant fees. These are “saved” costs.
  3. Excluding Fixed Overhead:
    Rent, insurance, base salaries are generally NOT deducted — incurred regardless of lost activity. This is why gross profit vs net profit matters.
  4. Mitigation:
    What plaintiff did or should have done to reduce loss — e.g., finding replacement vendor. Failure to mitigate reduces damages.
  5. Prejudgment Interest:
    10% per CCP 3287/3289(a) — often adds 30% to damages over 3 years. Calculated from date of loss.
  6. Discount Rate for Future Losses:
    When lost profits extend past trial, discount to present value. Commercial discount rate = WACC reflecting company risk, higher than risk-free rate used in PI cases. A dollar today is worth more than a dollar tomorrow.

Key California Issues

Can a business with losses claim lost profits? Yes. Damages simply adjust the loss — $50k loss becomes $20k loss if you prove $30k lost profits.

Can a new business claim lost profits? Yes. Old rule said no. Under Sargon Enterprises v. USC (2012) and FRE 702 2023 amendment, new business CAN claim if methodology is reliable. I did this in retail store fraud case — 6 months history was sufficient because I proved trend via bank/POS/tax match, not just projection.

Speculation gets excluded. Lost profits based on plaintiff’s own spreadsheet with no historical data, no market study, or using gross revenue not net — excluded under Sargon. Report must show: Facts, methodology (NACVA/ACFE), application, opinion with exhibits.

Example

Distributor terminated in breach of contract:
Historical revenue $100k/mo, 40% gross margin.
Avoided costs: $60k COGS + $10k commissions = $70k.
Lost profits = $30k/mo x 12 month loss period = $360k.

  • 10% prejudgment interest 2 years = $72k.
    Total = $432k. Linked to QuickBooks, bank, invoices Bates 001-250.

Cost

Preliminary lost profits calc example $5k-$15k, includes data collection, trend analysis, damages summary. Expert testimony $375/hr as of 2026. Free 15-min conflict check.

Based in Fremont, serving Bay Area: San Jose, Oakland, San Francisco and beyond. See my Forensic Accounting vs Auditing and Legal Issues for Experts pages.

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