Page 39 - Calculating Lost Profits

Expanding on the American Kitchen example, assume that the 11th location opened in late 2013 and op-
erated for 3 full years prior to Franchisor requiring the closing of the location. Under the before-and-
after method, one way to estimate revenues would be to analyze and use the revenue data for the 36-
month period prior to the location shutting down. The following table summarizes the food and beverage
revenue of the 11th location.

Figure 6.1. Historical Revenues for 11th Location

As shown in the preceding table, the location grew by $20,060 between 2014 and 2016. Possible meth-
ods to estimate lost revenues using this information may include analyzing the average monthly change
in revenues, analyzing the compound annual growth rate between 2014 and 2016, or analyzing the aver-
age annual change in revenues. Although using any one of these percentages to project future revenues
may be appropriate, each has different considerations.

For example, when analyzing the average monthly change in revenues, the practitioner would likely
want to research any possible seasonality, such as June and July in the preceding example data, as well
as any outlying months, such as October 2016.

The month of October 2016 had substantially higher revenues than other months and could be the result
of a nonrecurring event, such as a large conference or other event held at the college campus where the
restaurant is located. Alternatively, if a similar event were to also occur in the "after" period or can be
expected to occur again, then it would likely be appropriate to include this month in the data used for the
estimation, unadjusted.

If using a compound annual growth rate, the practitioner may want to consider researching the composi-
tion of the revenues in the two periods that are used in the compound annual growth rate calculation.
Simplistically, a compound annual growth rate does not consider any actual data between the start date

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