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Claiming Lost Profits for Start-Ups

When someone is harmed, he or she is generally entitled to lost profits. But what if the claimant is a start-up company with no operational history?

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"

A Business Plan
Among the factors that can support a lost profit claim by a startup 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.
Industry Expertise
Management experience in the industry in which the startup would have operated is another measure of reasonable certainty. Provided that management is experienced, a startup might also point to successful similar businesses as an indicator of its lost potential. For example, a startup fast food franchise might be able to claim reasonable certainty of lost profits by demonstrating the success of similar restaurants in the same market.
Favorable Economic Conditions
A startup 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 startup would have operated.
Access to Capital
What are the costs associated with generating the level of sales the startup 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.