4. Company Valuation and Purchase Price Agreement

The greatest challenge for both the seller and the buyer is reaching a mutual agreement on an acceptable purchase price. This value can be approximated if we start from the assumption that the company generates profits. The enterprise value calculated using the capitalized net earnings method is, in this case, the sum of the earnings expected in the future -- of course for the assumed duration of the company -- at the valuation date, i.e., its present value. However, this is not simply the sum of individual annual profits, but rather profits discounted by a specific capitalization interest rate. The discount rate is determined, among other things, by the sum of the interest rate on investments in risk-free assets -- the reference or base interest rate (e.g., long-term government bonds) -- and the sum of premiums for general business risk, specific company risks, lack of substitutability, etc. The comparable DCF method determines the company's value similarly, based on discounted cash flows.

The basic formula for calculating the earnings value can be expressed as: V = SNE / ic where V = enterprise value, SNE = sustainable net earnings -- expressed in constant prices at the valuation date; ic = calculated interest rate adjusted for inflation = at the level of the real rate (interest rate as the sum of the reference interest rate (base rate) plus risk premiums)

Perpetual annuity means the value that must be invested to achieve the same annual profit of the company. The formula shows that the lower the capitalization rate, the higher the return on capital.