There are an increasing number of headlines speculating about the extent of damage and related litigation stemming from the BP oil spill.
There are three parts to a claim for business losses. There is the physical loss say in the case of a fire and then lost profits due to business interruption. In addition, there are punitive damage awards. This is where a business is awarded compensation over and above actual losses. These are called punitive damages and are typically for pain and suffering. Normally in the case of a accidental fire or damage from weather (natural cause) there would be no basis for punitive damages. The BP oil spill falls into the category of an event that likely has the basis for punitive damage awards.
Consider a seafood restaurant on a coast line that has been family owned for generations. It has a great reputation and has been consistently profitable. Within weeks of the BP oil spill on the news sales began dropping, continued to drop get worse. For example, say the restaurant has been doing $2.0 million in sales and earning $200,000 profit before tax. Sales and profit growth rate has averaged 8% per year for the last five years..
Where there is physical damage and business is interrupted, there is the predicable loss of profits from business that would have continued had the business not been damaged. However, when the supply chain is interrupted because people no longer have confidence in the food or where the fish supply is greatly reduced resulting in much higher prices, that is a different story.
Assume sales drop to where it is not possible to remain in business. There are a multitude of issues. It is unlikely the restaurant can be sold as a restaurant since the market has lost confidence in the quality and availability of the product. What about alternative use for the property. Eventually there is always an alternative use. However, the business or buyer having an alternative use in mind is likely looking to acquire the property at a distressed price.
Bottom line… any outcome other than the sale of the business as a viable going concern with a predictable cash flow based on verifiable results is going to be a distressed sale. Losses in this situation will be future earnings plus diminished value of the property plus punitive damages for pain and suffering.
What would I recommend to a client whose business is destroyed or severely damaged by he BP Oil Spill?
1. Hire the best lawyer possible with a contingency fee arrangement. The best lawyer is one who has experience with business interruption loss experience and a track record of winning awards beyond physical losses. I would research lawyers who have won similar cases. The BP oil spill is not the first one.
2. Be sure to have a business expert as part of your professional resource team. This may seem self serving. It is not. You need a business professional to work with your attorney on a practical strategy that will hold up in court. The stronger your position the more likely for a quick equitable solution outside of court. In settlement you want a balance of business and legal advice.
I welcome and encourage all comments from attorneys, business valuation experts and those whose businesses are potentially affected by the BP oil spill.
Steve Pohlit
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About: Steve Pohlit is a CPA,MBA and has been the CFO of several major domestic and international companies. He is an expert business coach and consultant focused on building business profits and net asset value at above average rates. All articles published by Steve unless specifically restricted may be freely published with this resource information.
Great advice Steve.
This is a major screw up and will impact the gulf and east coast for quite a while.
If tourists stop coming to these shore towns because the beaches are like some sadistic salad dressing… it effects everyone that that lives in that town.
From the restaurants, to the tour guides, to the Scuba instructors, to the sunset cruise operators to the innkeepers. EVERYONE is affected and BP should pay for this!
Thanks for pointing out how they can get help.
This is a SERIOUS and perhaps irreversible problem that BP alone has created. Well… Actually G W Bush is at fault to for his sloppy and likely crooked watch over this industry during his reign…. but that’s another post!
Steve,
This is a timely and useful article. It may be difficult to make solid projections, especially if the business has been slipping for more than one reason, or they place the start date of the loss too late. We have been recovering from an economic disaster for a year. If you start the loss valuation from the start of the “spill” you will only encapsulate a snapshot of the recession.
It is notoriously difficult to get solid numbers from other small businesses to use as an index for a class of business’s loss. It would be very helpful for the family businesses in this situation to look to the closest associated large business and attempt to develop your potential loss picture by looking at how the larger business appears to be computing losses. I used a similar system to turn around a business in 1989 when that particular recession came through. This un-natural disaster added to the economic meltdown of 2009 will have much more effect on more companies and individuals.