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Important Case Decision for Lost Profits and Economic Damages Expert Witnessess

October 14, 2011

A recent review of the case decision in M & A Technology, Inc. v. iValue Group, Inc. notes that the Texas Court of Appeals’ decision is of particular importance to accounting expert witnesses specializing in lost profits and economic damages calculations.  The review by an anonymous expert witness is worth reproducing in its entirety and is contained below:

The Texas Court of Appeals decision is instructive for the computation of lost business value damages, especially for an unestablished enterprise.  In particular, the decision suggests that iValue’s valuation expert (Alan Rastiff) provided detailed computations and considerable empirical data.  Regardless, the expert’s damages were determined to be too speculative.  The expert offered the three approaches to valuation.  The iValue projected income was determined by manipulating discrete statistics for web page views, click-through rates and probabilities of goods/travel purchases.  Average purchase dollar amounts for either goods or travel were estimated.  Such information was used for the income approach to valuation, as well as forming the foundation for the market approach to valuation (e.g., applying market comparable revenue multiples).  Further, the expert estimated the value of the investment through the cost approach that, in part, relied upon the costs invested by others in the industry although much large companies.

The expert’s determination of lost business value failed, apparently, because the expert did not demonstrate it was more likely than not that iValue would have achieved the expert’s financial projections (a court finding that applied to values determined under both the income and market comparable approaches).  Further, the Appeals Court noted that cost investments by much larger, successful companies were not analogous to iValue.  In addition, the Court observed that iValue had virtually no cash resources and was unable to raise the needed additional capital to have pursued its business plan.

Interestingly, the expert used a 32.5% discount rate, which the Court does not address, particularly as sufficient to account for the future risk and uncertainty  of iValue’s hoped-for business success.

Do you have a response to this review?  Post it on the discussion page for the M & A Technology, Inc. v. iValue Group, Inc. case decision.

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