VALUING LOST PROFITS FOR LITIGATION PURPOSE Part of the All About Business Valuations For 2015 Series Premiere Date: February 6, 2015 VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015 ©2014 1

MEET THE FACULTY Garth Tebay, Tebay Associates J. Richard Claywell © Moderator: Gary Frantzen, Alvarez & Marsal LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

Practical and entertaining education for business owners and executives, accredited investors, and their legal and financial advisors. For more information, visit DISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS © VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

EPISODE 2 – VALUING LOST PROFITS FOR LITIGATION PURPOSE What is important and who determines the weight placed on those factors in a lost profit case? This webinar will feature a panel of experts who have successfully battled in lost profit cases. FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC © VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC © What are lost profits? Is there a difference between lost profits and lost business value? Can a new business or a business that never made a profit claim a lost profit? INTRODUCTION & BASICS VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

STANDARD FOR PROVING LOST PROFITS FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC © What are the elements of proving lost profits? Basic legal standard of proof Must plaintiff have tried to mitigate damages? Must plaintiff demonstrate lost profits with certainty? Can plaintiff’s own conduct/negligence be taken into account? Are there different methods for calculating lost profits? What evidence can be used to support various calculation methods? How far into the future can/should lost profits be projected? If a new business makes a claim for lost profits, what is needed to prove the amount lost? VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

Some Questions to Consider in Determining Lost Profit Damages What caused the loss? Who caused the loss? Might other things have caused the loss? What is the best measure of the loss? What is the period of damages? What kind of financial and operational information is available? Is it reliable? What were the trends in the business and industry at the time of the loss? What is the capacity of the business? Could it have generated the lost sales? What are the primary risk factors facing the business? – Technological – Regulatory – Competitive © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

“Time is Money” 1.Lost profits occur over time but are calculated as of the date of trial or date of injury 2.To calculate lost profits: Past losses should be accumulated to present value Future losses should be discounted to present value Choosing the right interest rate Basis - the rate that would compensate the plaintiff as though the damage had not occurred – i.e. making the plaintiff whole Common rates: Risk-free rate of return Risk factor relative to the earnings projection Company’s weighted average cost of capital (debt and equity) Statutory © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

COMMON ISSUES IN MEASURING DAMAGES Causation – Should the damages expert opine or assume? Causation – Can the damages expert rely on another expert? “Externalities” – in the industry; in the company Methodology – generally accepted? applied properly? Use of hindsight (on projections) Present value discount rates applied to financial projections Business Valuation discounts: – Lack of Control (Minority Discount) – Lack of Marketability/Liquidity (Marketability Discount) Reliability of management’s projections © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

PROVING LOST PROFITS: Expert Testimony FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC © If yes, what kind of expert do you need? If no, is it best practice to hire an expert anyhow? Is an expert needed? VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

EXPERT TESTIMONY CONSIDERATIONS FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC © Must expert be qualified by court? What standards must expert follow or meet?What kind of work product and methodology is expected of expert? How will experts calculate lost profits? What care/precautions should lawyer take when preparing and working with expert? Is present value taken into account by lost profits expert? VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

DEFENDING AGAINST LOST PROFITS ACTIONS 12 FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC ©2014 What defenses exist to a lost profit action? What can a party do to challenge the lost profits findings of an expert? VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

Commonly Accepted Lost Profits Methods Market Share Approach Before- and-After Approach Yardstick Approach Sales Projection Approach © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

Incremental Revenues and Costs Lost profits as measured by: – Lost incremental revenue, less related incremental costs Gross margin often = incremental loss (within a relevant range) Truly fixed costs typically excluded © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

“Before-and-After” Approach to Lost Profits Estimate of lost profits based on a comparison of the plaintiff’s sales before the damaging event with a projection of sales that would have been achieved had the damaging act not occurred (“but for” sales) reduced by incremental costs. When Appropriate – When reliable historical data exists – When growth trends are steady and predictable – In relatively static competitive environments Strengths – Relies on plaintiff’s actual, historical financial results as basis for comparison to estimated future results – Courts often favor financial projections based on past results Limitations – Requires sufficient historical data – May not account for industry changes – Periods before and after damaging act may not be comparable – Unavailable for newly established firms © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

“Yardstick” Approach to Lost Profits Estimate of the plaintiff’s profits based on a yardstick – e.g., a comparable company, division or industry benchmark - that is not affected by the damaging act When Appropriate – When reliable yardstick exists – With newly established firms – Accounts for differences in time periods Benefits – Can provide objective, reliable benchmark for estimating – Yardstick is independent of effects from damaging act – Accounts for changes in industry or market Limitations – Lack of comparability between plaintiff and yardstick (e.g., size, sales channels). – Yardstick data may not be available © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

“Market Share” Approach to Lost Profits Calculates lost profits based on the difference between the plaintiff’s “but-for” market share and its market share after the damaging act. When Appropriate – When reliable market share data exists – When plaintiff company products/services fit within “market” Benefits – Can provide objective, reliable basis for estimating – Other companies in “market” are independent of damaging act – Accounts for changes in the industry during relevant period Limitations – Difficult to determine market share – lack of data, comparability – Difficult to assess due to dynamic markets © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

Choosing the Right Approach 1.Consider the availability of information – from the company, the industry, competitors, industry analysts, etc. 2.Consider following factors prior to damaging act: – Were plaintiff’s sales trends steady and predictable? – Were plaintiff’s sales trends comparable to another company or industry as a whole? – Which approach is most consistent with facts in case and market conditions during damage period? – Is company’s financial information reliable? 3.Which method is the most practical to use? – A combination of approaches can be used. Source: Robert L. Dunn, “Recovery of Damages for Lost Profits”, Volume 1,§5.5 © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

RECAP: FRAMEWORK FOR CALCULATING LOST PROFITS 1.Analysis of macroeconomic and industry trends 2.Analysis of factors causing the loss 3.Analysis of plaintiff company’s financial trends 4.Estimate of incremental lost sales – “But for” sales minus actual sales 5.Estimate of incremental costs associated with lost sales 6.Lost profits = Incremental revenues – incremental costs 7.Discount future lost profits to present value using risk- adjusted discount rate © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

ESTIMATING FUTURE PROFITS 1.Must be based on reliable information and reasonable assumptions 2.Common sources: – The plaintiff’s prior, actual experience – The plaintiff’s subsequent, actual experience – The plaintiff’s budgets, forecasts, or projections (prepared prior to the damaging event in the normal course of business) – Identified lost customers – The comparable experience of others, including its own experience at other locations or divisions – The defendant’s subsequent experience – Industry averages (i.e., yardsticks). © FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

ESTIMATING FUTURE PROFITS VALUING LOST PROFITS FOR LITIGATION PURPOSE: March 6, 2015

MORE ABOUT THE FACULTY: J. Richard Claywell Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies since Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit planning. Richard received his Bachelor of Science in Accounting in 1979 from the University of Houston – Clear Lake. He then received certification as a Public Accountant in Over the years, Richard has earned additional accreditations that relate to business valuations, economic damages and fraud. Richard has been an instructor for the National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is currently the Director of Education for the IACVA and is responsible for the business valuations materials being taught in 55 countries. Richard has taught business valuation or economic damage courses in China, Korea, Taiwan. Richard has performed over 1,000 business valuations since Richard has testified in Texas County Court, Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages (lost profits), shareholder disputes, personal injury, wrongful termination and divorce. Richard has given he following presentations: Practitioners Publishing Company (PPC) Contributing Editor – Guide to Practical Estate Planning, 2008, 2012 Forensic Accounting Conference - The Risk Assessment and Prevention of Fraud in Business at the National Taipei University on April 27, The presentation was titled “The Meaning and Importance of Risk Assessment and Prevention of Fraud in Businesses” Central University of Finance and Economics in Beijing China, presented a class titled “Relationships Between Risk and Value in Valuation” to graduate students. On April 29, 2012, Richard accepted an appointment to adjunct Professor of Valuation at the Central University of Finance and Economics and Research Fellow of the Appraisal Institute, Asset Appraisal Institute of the Central University of Finance and Economics in Beijing China. Co-Presenter of weeklong business valuation course for the Chinese Appraisal Society, November 2008, Beijing, China. A partial list of some of the topics instructed include: (1) remaining useful life analysis, (2) survivor curves, (3) valuing customer relationships, (4) valuing brands, (5) allocation of goodwill, valuing software, (6) quantifying synergies Taipei International Conference: Valuation and Forensic Accounting. Presenter, Fraud Prevention and Detection.(November 2009). Chinese Appraisal Society in Seattle Washington, Presenter, Using Income Approaches and Using Guideline Companies, August 2, Shanghai University of Finance and Economics, Co-Presenter, The Relationships Between Risk and Value: The M & A Transaction, Value and The Valuation Report: What Do You See?, Value, Fraud, Risk: From Valuation to Fraud, September 19 – 21, Asian-Pacific Conference on Valuation and IFRS in Seoul South Korea, Presenter: Fraud, Risks and Valuations, December 3, Chinese Appraisal Society in Beijing China, Presenter, Fundamentals of Business Valuations and Co-Presenter, Valuing Intangible Assets, December 12-13, The Meaning and Importance of Risk Assessment and Prevention of Fraud in a Business, IACVA presentation, June 2013, Washington DC. The Meaning and Importance of Risk Assessment and Prevention of Fraud in a Business, Chicago International Business Valuation Symposium, IACVA presentation, October 11, 2013 As an instructor for the National Association of Certified Valuation Analysts, Garth teaches the Current Update on Valuation, the Fundamental Techniques & Theory (FT&T days 1 and 2) and Asset and Income Applications and Calculations Case (day 3) at NACVA Training Centers since In 2010, Garth was appointed Business Valuation Training Center and Current Update in Valuation Content Manager. He is the co-chair for the Valuation Symposium at the 2011 NACVA National Conference. In addition, Garth has presented the valuation program for the Internal Revenue Service, the Small Business Administration (SBIC Division), The Korean Valuation Association, presented Forensic Accounting for White-Collar Crime to the National College of District Attorneys, wrote instructional materials for NACVA program “Business Valuation Fundamentals for the CPA” (2005), co-authored instructional materials for NACVA programs “Fundamentals, Techniques & Theory” & “Case” (2005), and has been recognized with NACVA’s “Outstanding Member Award” (2005) as well as their awards “Instructor of Exceptional Distinction” in 2003, 2004, 2005, 2006, 2007, 2008 and “Instructor of Great Distinction” in In addition to authoring portions of the training curriculum, Mr. Tebay has presented numerous seminars on the topic of business valuations. FINANCIAL POISE, A DIVISION OF DAILYDAC, LLC © VALUING A BUSINESS FOR A SALE: FEBRUARY 6, 2015

MORE ABOUT THE FACULTY: Gary T. Frantzen, CFA Gary Frantzen is a Managing Director and leads Alvarez & Marsal’s Valuation Services practice in Chicago. He specializes in the valuation of businesses and business interests including equity, liabilities and debt securities, options and other derivative securities / instruments, intellectual property and other tangible and intangible assets. Mr. Frantzen has provided opinions of value, fairness and solvency for a wide variety of purposes including financial reporting, tax planning and reporting, dispute resolution, mergers and acquisitions and other business purposes. He has advised clients regarding the value impact of potential strategic alternatives, business plans and enterprise transactions; valued assets for business combinations, fresh start accounting and impairment measurement; valued business interests for tax planning and reporting, and has provided independent fairness and solvency opinions regarding contemplated transactions. With more than 25 years of experience, Mr. Frantzen has provided valuation advice in a wide variety of situations and industries to management, board members and special committees, attorneys, individuals and the courts. Notable assignments include: the valuation of tangible and intangible assets of a multi-billion dollar, multinational corporation for fresh start accounting; the valuation of the assets of a regional health system with respect to its acquisition by a major university medical center; the valuation of large water and transportation infrastructure projects for financing-related purposes and financial reporting; the valuation of the tangible and intangible assets of a large, multinational chemical producer acquired by a large private equity sponsor; and the valuation of the shares of a publicly-traded hospital management company related to a dissenting shareholder dispute when their shares were acquired in a private transaction. Mr. Frantzen earned a Bachelor of Science in Civil Engineering from the University of Illinois at Urbana-Champaign and a Master of Business Administration in Finance from DePaul University’s Kellstadt Graduate School of Business in Chicago. Mr. Frantzen is a CFA Charterholder (Chartered Financial Analyst), and is registered with FINRA as a General Securities Representative and Securities Agent (Series 7 and 63). He is a former Professional Engineer in the State of Illinois. 23 ©2014 BASICS OF BANKRUPTCY LITIGATION: MAY 20, 2014