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Business Valuations: Before and After the Storm

The impact of natural disasters that occurred in 2005-ranging from a series of devastating hurricanes along the Gulf Coast, to brush fires and landslides in the West as well as other unfortunate occurrences-continues to be felt. One of the by-products is the effect on the valuation of certain businesses. Certainly, the interruption in normal business operations due to a natural disaster is a factor to be considered.

Business appraisers may be called upon to estimate the value of the lost profits of a business due to a business interruption. In cases where a business is substantially destroyed, the market value of the business must be properly determined.

Background: Frequently, business interruptions are caused by natural disasters and other types of casualties. In the usual situation, the business owners have opted for insurance coverage designed to meet specific objectives. Nevertheless, coverage may be inadequate or insufficient, especially if it has not been updated in several years to meet the changing needs of the business.

For instance, if the business is located in an area that is prone to floods, the owners may acquire flood insurance for their protection. If a flood occurs, it may result in a short-term or long-term interruption in the company's operations. The business appraisers preparing the damages claim must have a thorough understanding of the policy coverage. Damages will paid for physical damages to the insured property that have been caused by the covered event. The measurement of the loss is the crucial issue.

Although lost profits are typically measured by the profits that a business would have earned if an interruption had not occurred, even companies that were operating at a loss prior to the event may be entitled to recover various fixed expenses that continue during the interruption period. Note: Because some insurance claims are settled after the nature of the coverage is determined, appraisals are often required to estimate the amount of the loss to resolve a business interruption insurance claim.

In summary: An accurate projection of profits that would have been earned if the disaster had not occurred requires a complete understanding of the company's financial affairs-both before and after the loss occurs. Consult with a business valuation expert regarding your situation.

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