Over the years we have been hired to calculate losses of income suffered by businesses affected by events beyond their control. Some of the more common “unforeseen” events include:
- Owner/operator suffered injuries in a motor vehicle accident;
- The business had to move due to an expropriation of some or all of its premises;
- An event occurred which caused the business to lose revenues; or
- An event occurred which caused the business to incur additional expenses.
Generally speaking, the concept to is try to put the business back into the position it would have been had the incident not occurred. We attempt to calculate (usually on an annual basis) the earnings the business would have generated absent the accident or event. We then deduct the actual earnings generated by the business to arrive at our calculation of the loss of earnings.
The challenge is to determine the business’ earnings absent the incident using supportable assumptions. Owners may believe the business would have grown at a much faster pace than it had prior to the incident. It is helpful to have evidence from sources outside the business to support growth assumptions. For example, data published by Statistics Canada that shows businesses within a given industry are reporting a 5% annual revenue growth would be useful to consider when determining a business’ revenues absent the incident or event. Of course management’s growth expectations are considered however third party data can go a long way to supporting the assumptions used when determine a business’ loss of earnings.