To claim lost profits, the courts require a business to forecast its loss with “reasonable certainty” by identifying:

• Future sales
• Costs it would have incurred to generate sales
• Resulting profits

However, reasonable certainty is often difficult to identify with start-ups. “The key to reasonable projections are some reasonable assumptions, accompanied by a thorough analysis,” says Gleason’s Doug King.

Contributing Factors to “Reasonable Certainty”

1. A Business Plan
   Among the factors that can support a lost profit claim by a start-up company is a credible business plan that outlines the company’s potential for success along with records and data that back-up the plan and demonstrate progress. If there are investors who evaluated the plan and took a risk, even better. The availability of records and data that back-up the plan and demonstrate progress is also decisive. “A well-researched business plan can not only jump-start a business, but also prepare it in the event of a future claim,” says King.
2. Industry Expertise
   Management experience in the industry in which the start-up would have operated is another measure of reasonable certainty. Provided that management is experienced, a start-up might also point to successful similar businesses as an indicator of its lost potential. For example, a start-up fast food franchise might be able to claim reasonable certainty of lost profits by demonstrating the success of similar restaurants in the same market.
3. Favorable Economic Conditions
   A start-up technology company attempting to prove a lost profit claim may have had a fighting chance in the mid-1990s, but probably would have difficulty in the period immediately after the technology bubble burst. To be successful, a case must be able to demonstrate a promising economic outlook for the industry in which the start-up would have operated.
4. Access to Capital
   What are the costs associated with generating the level of sales the start-up is claiming? Did the company have access to the necessary capital? According to King, successful claims must provide a convincing profit and loss analysis and credible proof that the company could have secured financing.

Excerpted from Briefly Speaking, a complimentary newsletter published by Gleason & Associates. Subscribe