Texas Appeals Court Reverses Judgement In Multi Million Dollar Case Following Insufficient Business Valuation Evidence

Zach Barreto

Written by
— Updated on July 22, 2019

Business Valuation Expert
Court: Court of Appeals of Texas
Jurisdiction: Fourteenth District, Houston
Case Name: Cargotec Corp. v. Logan Indus
Citation: 2018 Tex. App. LEXIS 10621


In this case, the appellant, Cargotec Corporation, breached the confidentiality provision of a letter of intent and committed fraud in connection with a failed proposal to purchase Logan Industries, an integrated design and manufacturing company specializing in heavy equipment for offshore energy companies. Logan filed suit against Cargotec alleging that Cargotec violated the confidentiality provisions of the letter of intent and improperly used Logan’s confidential information to open and operate a competing business. Logan sought damages for lost profits and the diminished value of its business.

The jury found that Cargotec failed to comply with the requirements of the LOI “with respect to the use of Confidential Information supplied to it” and committed fraud and awarded Logan damages of $2.7 million for lost net profits and $10 million for loss of value. The jury also awarded Logan attorney’s fees totaling $430,000.

Cargotec Corporation challenged the trial court’s judgment on the jury verdict, contending that the evidence was legally and factually insufficient to support the jury’s liability and damages findings. Cargotec also raised numerous challenges to the legal and factual sufficiency of the testimony of Logan’s business valuation expert in support of Logan’s damages.

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The Business Valuation Expert

Logan retained a certified public accountant expert witness accredited in business valuation to opine on damages. The expert testified that he was retained to consider Logan’s claims of alleged wrongdoing by Cargotec and to make a financial assessment as to what had happened.

Although the expert prepared a report of his assessment, it was not admitted into evidence and was used only as a demonstrative exhibit to illustrate how he reached his opinions concerning Logan’s lost profits and diminished value resulting from Cargotec’s alleged wrongdoing. Only one page of the report—a chart of the expert’s lost profits calculation—was admitted into evidence. The expert acknowledged that he relied on Logan’s business plan for both his lost profits and diminished value opinions.

The expert testified that it was reasonable to use management projections in reaching opinions concerning lost profits and lost business value if the projections can be substantiated. He further explained that there is a thought process that goes behind the math. Although the expert proceeded to describe the information he reviewed in order to reach his conclusion, he never explained what, if anything, he did to substantiate the business plan projections.

The expert admitted that he did not “go behind the numbers” and perform an independent calculation to determine the basis for the projected total revenues and cost of sales that were reflected in the business plan because “the calculation had already been made.” The expert did not attempt to determine what customers would provide Logan’s revenues, identify the type of work that would supply Logan’s revenues, or determine the costs that would likely be incurred. Likewise, he did not try to attribute the alleged lost profits to any particular customer or source of revenue.

The business plan reflected that for 2010 Logan anticipated a total revenue of $20.4 million and an operating profit of $5.35 million. Although Gridley wrote the business plan in late 2010, at a time when he should have been able to reasonably forecast the anticipated profits for that year, Logan’s actual gross profit in 2010 was $7,669,750.00, actual net income was $1.52 million and operating income was just $875,577. According to the expert, the business plan also anticipated that total revenue and operating profit in 2011 would increase by roughly 40% over the anticipated 2010 projections, a goal that appears unreasonably optimistic considering Logan’s actual 2010 performance.

Additionally, the business plan projections assumed that Logan’s facility would be expanded, however, the expansion did not occur. The expert conceded that one of the business plan’s underlying assumptions was not fulfilled. The expert also conceded that historically Logan had never had profits of the magnitude the business plan projected. Nevertheless, the expert accepted Logan’s assumptions of future revenues as the basis for his damages opinions.

The expert admitted that he did not make any independent projections of Logan’s revenues or profits, but he denied that he merely accepted them at face value. The expert also testified that he adjusted the business plan projections downward by applying a discount factor, which he termed a “financial haircut.” The expert explained that the discount factor accounted for the time value of money and various factors relevant to a business such as Logan’s. The expert admitted, however, that no amount of adjustment or “haircut” could make an unsubstantiated, overly optimistic business plan reliable.

Trial Testimony

Logan contended that the expert’s opinions should be accepted because they were consistent with independent valuations and financial analyses prepared by Howard Frazier Barker Elliott, Inc. (HFBE) for Huisman, and Pricewaterhousecoopers (PwC) for Cargotec. According to Logan, the expert employed the same methodology as these valuation firms and reached similar results.

At trial, the expert testified that among the materials he reviewed in preparing his opinions was a business evaluation of Logan prepared by HFBE. Like the expert, HFBE based its valuation of Logan on Gridley’s projections contained in Logan’s business plan. According to the expert, based on the income approach to valuation, Logan was worth $31.1 million prior to Cargotec due diligence, which he testified was consistent with Huisman’s valuation. The expert also testified that his valuation using the income approach was corroborated by his valuation using the market approach. But the expert provided no information or analysis explaining the basis of HFBE’s evaluations other than to state that HFBE used the same management projections and employed the same methodology that he used.

The expert did not testify at trial about the evaluation PwC prepared for Cargotec or make any comparison of his conclusions to those of PwC, but he did compare his valuation of Logan to Cargotec discounted cash flow analysis of Logan.  The expert opined that by applying the “complete income approach” to Cargotec numbers, he valued Logan’s business at $33.8 million as of January 2011. The expert also stated that subtracting the amount that Logan sold for in October 2012 from $33.8 million reflected “roughly” a $10 million reduction in Logan’s value, consistent with his calculation of Logan’s lost value. On cross-examination, however, the expert acknowledged that Cargotec “best case scenario” based on its discounted cash flow analysis was $24.9 million, an amount less than the $26 million Cargotec offered to acquire Logan in June 2011.

Accepting for purposes of argument that the evaluations of HFBE and PwC were consistent with the expert’s opinions, Logan pointed to no evidence presented at trial that either evaluation substantiates Gridley’s gross profits projections in Logan’s business plan. The mere fact that the evaluations could have been roughly consistent with the expert’s opinions did not demonstrate that the assumptions in Logan’s business plan were reasonable.


It was determined that because the holding disposed of the appeal, judgment on the issue regarding whether the evidence was legally insufficient to establish causation and damages was reversed and rendered in favor of Cargotec.

In summary, the evidence supporting damages, in this case, consisted of:

  1. Logan’s bare assertions that it lost business, unsupported by any evidence that it lost specific customers or business that it would have obtained but for Cargotec’s wrongdoing
  2. The expert’s calculations of lost profits and diminished value damages, both of which were predicated on Logan’s bare assumptions of projected revenues and profits in its business plan, were unsupported by objective facts, figures, or data establishing that these assumptions were objectively reasonable.

Thus, even if some evidence supported a finding that Cargotec breached the LOI or committed a tort by misusing Logan’s confidential information, Logan could not recover lost profits damages or lost value damages.

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