FEBRUARY 2017
In This Issue

 

 
We are grateful to have the opportunity to provide you this valuable information via our monthly e-newsletter and our unparalleled forensic accounting and fraud investigative services.
 
The goal of this e-newsletter is to provide you critical, inside information that will help you "follow the money" in business disputes, divorce cases, fraud cases, estate matters, corporate embezzlement and to prevail when defending an IRS criminal case. We will do this by sharing the knowledge we have from our 25+ years of experience as an IRS Special Agent and 15 years as a private investigator / forensic accountant. 

We take special care to ensure the information we provide you in "The Beacon" is the latest and most current information available. In this edition, we share how to determine loss profits in business litigation.

We want to write about topics that will assist you in prevailing with criminal or civil cases whether IRS cases or divorce cases. Please e-mail us your topics of interest to Thebeacon@sageinvestigations.com 
 
We encourage you to share our e-newsletter with others in your sphere of influence.  
 
Sincerely,
 
Edmond J. Martin
 
Principal, Chief Investigator
Certified Fraud Examiner (CFE)
Texas Certified Investigator (TCI)
Business Litigation: Determining Lost Profits 

The following is a discussion of a business that incurred a loss of profits and sustained damages, which can result from any number of harmful fraudulent acts, such as the creation of a fictitious vendor, embezzlement, a ghost employee, or personal expenditures paid through the business. 

If a business is subject to these wrongful acts by an inside or outside party that causes lower than expected profits, the injured shareholder or business may have a claim for loss profits damages. When the financial expert is retained he or she should meet with the attorney to discuss the facts and the appropriate measurement of damages. The date of the wrongful act is the starting date of the damage period. The ending date should be discussed with the attorney.

The damage calculation should result in restoring the plaintiff in a law suit to the financial position it would have been in, if not for the wrongful acts of the defendant. The primary calculation is the present value of projected cash flow. The lost profits calculation generally falls under one of these scenarios:
  • Before and after method using company data;
  • Yardstick method using guideline companies; or,
  • Sales projection method using company projections.
The financial expert should have a complete analysis of the acts which caused the lost profits to meet the following standards:
  • Proximate Cause: Proving the defendant's actions caused the claimant's damages to happen.
  • Foreseeability: Could the plaintiff foresee the possibility of the wrongful actions and mitigate damages?
  • Reasonably Certainty: Are damages readily certain to be the result of the alleged wrongful actions?
The profits from the income stream is the incremental revenue, net of avoided cost, or cost saved the past period, is calculated through the date of trial.

Within the damage period projections must not be speculative. They must be reasonably certain. The financial expert should determine the manner in which the plaintiff mitigated the lost profits.

Here's an example, a closely held company which had three 1/3 interest shareholders. Two of the shareholders forced out the third shareholder who filed a minority suit to be bought out. While preparing the valuation the expert determined the two shareholders had set up a mirror company, under a different name, dealing in the exact products, which cause the profits of the original company to substantially decrease in order to reduce the buyout price. To solve this situation, the new mirror company books, organizational data, product line, and customer base were all analyzed. With the help of the expert, it was shown with reasonable certainty the setup of the mirror company was a direct and proximate cause of profits diverted from the original company.

If your minority shareholder client faces this scenario then Sage Investigations, LLC a leader in forensic accounting and financial investigations can help your client. With over 40 years of experience following money, Sage uses proprietary technology (DIO) to help develop the full picture of the financial aspects of the fraud. Sage strives to help clients structure a better future for their families. Learn more about assisting your clients by contacting retired Internal Revenue Service Special Agent Edmond J. Martin, Chief Investigator at Sage Investigations, LLC. Email edmartin@sageinvestigations.com website: www.sageinvestigations.com or call 512-659-3179. Thanks to Kenneth Huff, CPA for his contribution to this article.

About Us

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At Sage Investigations we are dedicated to serving our clients nationally, to help them navigate the difficulties of dealing with the IRS, and other complex (forensic) financial fraud investigations both civil and criminal. By narrowing our focus to our primary strength of following the money, we steer our knowledge, efforts, and experience to financial issues. We help our clients propel their cases forward by assisting in the review, acquisition, and organization of financial records, evaluating the elements of their cases, and helping create winning strategies. Through the use of our proprietary advanced financial investigative technology we analyze complex financial data quickly, easily and efficiently, saving our client's time and money.

 

Sage handles all cases with altruism, professionalism, honesty, integrity, passion and respect. When you hire Sage, you hire a team of professionals with skill and knowledge that helps you have more effective solutions. We are innovative with our DIO cutting edge technology, and perform every investigation in an orderly and organized manner to develop a clear investigative roadmap and deliver a quality work product. The compass that guides us is strong leadership and accountability. Learn more...

 

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Phone: 512-659-3179

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