Services

When the well runs dry…

Problem
Erector Construction was facing a significant problem. Four years earlier it had entered into a contractual agreement with a group of investors whereby the investors agreed to finance the construction of a high-rise residential condominium project in a very exclusive part of town. Part of the way through the construction project, the investors backed out of the project claiming that Erector Construction had mismanaged funds, irreparably delayed the completion of the project, and was not meeting construction code requirements. In response, Erector Construction denied all of the investors’ claims and counter-alleged that the investors were breaching the contract because downturns in the real estate market had significantly reduced the investors’ anticipated profits from the project. How can the investors, or alternatively Erector Construction, demonstrate the financial impact that the alleged breach of contract will have on their profits?

Issues to Consider
In this situation it is imperative that financial causation (as opposed to the legal concept of causation), but-for profits, and actual profits be thoroughly analyzed and understood. The underlying question is HOW MUCH was the party damaged as A RESULT OF THE BREACH OF CONTRACT? Given the set of circumstances above, the investors will need to demonstrate that Erector Construction’s alleged failures caused the investors to lose profits that it would otherwise have achieved, such as the opportunity to sell the investment in a more optimistic real estate market.

In the alternative, Erector Construction will need to demonstrate that it did not mismanage funds and that, in all respects, the investors’ failure to continue financing the project caused Erector Construction to incur greater costs in completing it, such as through the acquisition of alternative but more costly debt capital. At Sage Forensic Accounting, we have the expertise and experience to address these issues.

When it’s in the mix…

Problem
Helen, a world-class cyclist and amateur botanist, developed a nutritional supplement that was highly regarded and used by extreme sports enthusiasts. After researching the best methods for distributing her product nationally and internationally, she eventually decided to sell her product, Artemis, through a network marketing distribution channel. Shortly after the formation of Troy, her network marketing company, Helen received word from her network of independent distributors that certain supplement users were complaining of serious side-effects. Before long, Helen and her company became the subject of a class action product liability lawsuit. What potential economic damages may Helen and Troy have to pay if it is determined that Artemis was somehow responsible for the alleged side effects?

Issues to Consider
Assuming that causation can be proven between Artemis and the serious side-effects, there are a number of factors that may need to be considered when calculating economic damages. In addition to damages suffered by the supplement users, the independent distributors may also file lawsuits based on the assessment that they will lose profits and may even be put out of business. At Sage Forensic Accounting, we have the expertise and experience to address these issues.

When the wind leaves your sails…

Problem
Hydra, the alternative energy company that Brian started four years ago, was poised for greatness. The company had just closed a large government contract that was anticipated to significantly fund exponential long-term growth. Unfortunately, just as Hydra was to begin performance under the government contract, the single-source supplier of a unique component surreptitiously broke a vendor contract by refusing to sell to Hydra and selling instead to a direct competitor. Since the unique component could not be acquired elsewhere, nor could it be created by Hydra, the company was forced to cannibalize existing inventory. Once that inventory had been depleted, Hydra was unable to continue under the terms of the government contract and eventually lost the contract. How can Hydra determine the profits they have lost as a result of the breach of the vendor contract?

Issues to Consider
What would Hydra’s sales and profits have been but for the breach of the vendor contract. In addition to the value of the lost portion of the government contract, Hydra may also be entitled to the loss of its potential growth in size, revenues, and profits that can be related to the contract breach. It is also important to understand the correlation between causation, which is the basis for identifying the damaging party, and projected lost profits. Furthermore, Hydra may also suffer a permanent decline in business value or may even go completely out of business. For this additional analysis it would also be helpful to understand business valuation concepts in order to assess lost business value. At Sage Forensic Accounting, we have the expertise and experience to address these issues.