Michael Haugen 2014-07-26 00:20:03
Lost Profits – Transfer Sales An attorney representing a client in litigation involving lost profits for an entity with multiple operating locations must be aware of a number of issues specific to such a situation. This is true whether the case is related to lost income being claimed under an insurance policy (business income insurance) or lost income due to breach of contract or liability. It is also true whether the attorney represents the plaintiff or the defendant. A common type of business with multiple operating locations is a franchisee of a national brand such as McDonalds, Burger King, Subway or many others. Often a franchisee of one of these brands operates several locations within relatively close proximity to each other. Moreover, even if not a franchisee of a national brand, it is not uncommon for a local business to grow by adding locations and establishing a loyal customer base. Loyal customers of any business will often drive a few extra miles or adapt their daily driving routes to get their favorite burger or sandwich. Because of this situation, when operations at one location are suspended (the Loss Location), customers may transfer their business to another location operated by the same owner. Depending on the facts of the particular case, if such transfer sales occur, they should typically be considered in the lost profits analysis to ensure the measurement is a complete picture of the actual damages sustained; after all, a transferred sale in and of itself is not a lost sale. The methods and techniques applied to measure transfer sales will vary subject to the particular facts and circumstances of a given case. Common to any such analysis, however, will be establishing a foundation for the amount of transfer sales quantified. At the start of measuring potential transfer sales is an evaluation of the expected sales levels of each respective location but for an event that gave rise to suspended operations at the Loss Location. Those projections are then compared to actual sales from continuing operations subsequent to the suspension of operations at the Loss Location. When actual sales exceed projected sales for a given location(s), there is a possibility that such location(s) benefited from transfer sales. By itself, identifying sales of a particular location exceeding projected amounts is not the only step to measuring transfer sales. Another factor given consideration is proximity and competition. For example, a location 3 miles from the Loss Location may very well benefit from transfer sales while a location owned in a nearby city 25 miles from the Loss Location would be unlikely to receive transfer sales. The effect of store proximity on transfer sales, however, is commonly shaped to some degree by local competition. If there are few nearby substitutes to the Loss Location’s product, it may increase the distance loyal customers are willing to commute to obtain it. Although (subject to the type of business), proximity and competition commonly play a key role to whether or not transfer sales exist; often the closer the transfer location to the Loss Location the more likely transfer sales will occur. Evaluating sales trends at unaffected locations subsequent to the Loss Location closure can also provide insight to measuring transfer sales. For example, all else equal, the rate of Loss Location sales that transfer is expected to remain relatively consistent once consumers adapt to the new marketplace. Sustained deviation from an otherwise stable transfer sales rate may warrant further evaluation of the cause and its effect on transfer sales. Oversight of such changes may lead to understatement or overstatement of the actual lost profits sustained. Measuring transfer sales involves extensive analysis of multiple factors but is only the start to several key issues needing to be addressed in a lost profits case involving a multi-location business. Other issues can include quantifying cost savings at the closed location, increased costs to service transfer sales, and even the effects of potential transfer expenses such as staff moving from the Loss Location to another store. Experts should be prepared to assist counsel by providing a clear and concise explanation of factors considered in measuring the complete picture of losses sustained in a multi-location lost profits case. Michael Haugen is a Certified Public Accountant and Certified Fraud Examiner with extensive experience in financial forensics applied in litigation support, fraud investigation and verification of economic damages in insurance claims. Mr. Haugen has assisted in the successful resolution of hundreds of financial damages claims involving exposure in excess of tens of millions of dollars. His experience in economic damages includes, for example, lost profits, breach of contract, extra expenses, post-acquisition disputes, intellectual property, wrongful death/personal injury, and analysis of financial condition. For more information, visit www.eppsforensics.com or call (480) 595-0943.
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