A law firm that specializes in personal injury work has engaged you to assist in some litigation. The firm represents a Mr. Lawson, who was injured in an automobile accident and is alleging that he was totally disabled as a result of the accident. Lawson is seeking damages that in part reflect the loss of income from his interest in a partnership known as L & S Contractors (L & S). L & S is in the business of contracting to do residential remodeling jobs and has three partners: Lawson, Schmidt, and Jacobsen.
Sales and related income of the partnership have grown over the years although the residential construction industry is cyclical in nature. The law firm has provided you with copies of various partnership documents that may be relevant to this matter. A review of the partnership agreement reveals the following regarding the allocation of annual profits:
1. Salaries for Lawson, Schmidt, and Jacobsen of $60,000, $60,000, and $40,000, respectively.
2. Bonuses of 10% and 5% of net income after the bonuses for Lawson and Schmidt, respectively.
3. Profit and loss percentages of 30%, 30%, and 40% for Lawson, Schmidt, and Jacobsen, respectively.
Other relevant components of the partnership agreement are as follows:
1. Partners receive a draw on July 1 and December 1 of each year. Each partner’s draw is equal to one-third of 40% of the net income from the preceding year. Partners will receive draws for all years in which they were active in the business.
2. Unless modified by a majority of the partners, no more than 80% of annual income may be distributed to the partners.
3. Upon total disability, death, or retirement of a partner (referred to as a triggering event), the partnership will acquire such partner’s capital interest in the partnership. The amount paid will be equal to three times such partner’s average share of annual partnership income for the two years prior to the year of the triggering event. The acquisition price will be paid out in four equal semiannual payments beginning six months after the triggering event.
The automobile accident involving Mr. Lawson occurred on December 31, 2013. At his deposition, Mr. Lawson indicated the following:
1. He anticipated retiring at the end of 2018.
2. Net income of the partnership for years 2011, 2012, and 2013 was $161,000, $207,000, and $210,000, respectively.
3. Based on past and projected factors, he anticipated net income for years 2014 through 2018 to be $230,000 per year.
Required
Prepare a tentative measure of the economic loss suffered by Mr. Lawson as a result of the alleged total disability. Your measure of loss should be expressed as of the date of the accident and include appropriate present value considerations.