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What does ROI (Return on Investment) have to do with choosing to sue a business customer who has stopped paying for product received? Everything! There are costs involved in filing suit against a customer. In addition, the legal process is typically very slow, and the chances of collecting the debt owed goes down the older the debt becomes. For these reasons, it behooves a company to look at the ROI of a law suit before any legal action is taken.
To estimate a lawsuit’s ROI, the company must look at four things:
· the original debt amount;
· the lawyer’s contingency fee;
· the chances of successfully collecting the debt;
· and the company’s out of pocket court costs.
The total amount that could potentially be collected is the dollar amount of what is owed by the customer. From this total amount, the contingency fees of the lawyer must be deducted. If the litigation contingency fee is 35%, the Net Potential Recovery would be the original amount plus interest and recoverable costs less the contingency fee. Next we estimate the likelihood of collecting from the customer. Factors such as if the business is likely to continue operating, the quality and value of the customer’s asset base, other liens or judgments, must be looked at to arrive at this percentage estimate. Apply this percentage to the Net Potential Recovery amount to calculate the Expected Value of Recovery. The difference between the Expected Value of Recovery and the company’s out of pocket costs to litigate is the estimated return on investment..
If the ROI is large enough to make filing suit against the customer worthwhile, then the company should move forward with a lawsuit. If, however, the ROI is not significant, then it is probably better to not invest time and money in litigation. The Kaplan Group is a commercial collection agency specializing in large claims. More information including an infographic depicting the decision process behind filing a lawsuit and sample ROI calculations can be found on our website.
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