There's seldom been as good a market for small businesses. (Just ask those venture capitalists who sunk nearly $12 billion into young companies in the first half of the year.) Economic conditions are also great for running a company. (Just ask the entrepreneurs who sold stakes to those investors.) Of course, getting good value takes savvy -- no matter which side of the deal you're on. To glean some insight into the process for companies with sales of $5 million or less, Business Week Online's Jack Dierdorff and Dennis Berman talked to Ira N. Nottonson, author of The Secrets of Buying and Selling a Business.

Nottonson, a consultant based in Boulder, Colo., has been advising on small-business and franchise sales and purchases since 1986. He has owned a TV production company, an ad agency, and a law practice, and run other businesses, including a nightclub. Here's an edited transcript of their conversation.

Q. How does a potential buyer or seller figure out what the fair value of the business is?
A. Most businesses are not bought and sold for cash. But most buyers are still going to need money to pay off the seller. Where do they get that money? From the business they acquired. Every business must be able to service two interests of the buyer: a living wage ... and the money to pay for the business. If the price is too high, the buyer will not be able to maintain payments to the seller, in which case the seller may get the down payment and not much more [and], the buyer has invested in a disaster.

The seller always feels that his sweat and investment are much greater than can be assessed properly. The buyer needs to recognize all the things that need to be done -- investing in new equipment, getting new personnel, having enough dollars to move to the next plateau -- and has to be careful he or she doesn't overpay.

Q. Where can buyers and sellers come for help?
A. They can come to me, of course. I teach a class at the Small Business Development Center at the Chamber of Commerce here. And other SBDCs, of which there are many, would have similar help available. [Virtual brokerages are] another avenue for people to examine. The only problem is that once you make the initial contact -- back at the beginning of the ballgame -- you've got to do a due-diligence search of your own. You've got to have someone by your shoulder so you don't make any mistakes.

Q. Are there tax considerations to keep in mind?
A. Many sellers don't want to sell for all cash, because Uncle Sam becomes your partner immediately. From the other side of the coin, the buyer faces a variety of tax implications -- for one, the amount of hard assets that can be depreciated after the sale, which buyers always want to take advantage of.

Q. What are some of the most common problems people face in selling or buying a business?
A. One of the biggest problems is that the loyalty of the customer must be promised by the seller and delivered to the buyer.... This is especially the case in professions where the loyalty factor is much greater than in the normal retail or service operation -- though it exists there, too -- and in manufacturing. If half the customers don't stay with the business, then the seller only delivers 50% of the promise, and the buyer should be only paying for half. There's got to be an adjustment.

Take the example of the orthodontist who gets half of his business from dentists. How can you transfer the referrals from dentists whom you socialize with or go bowling with to the buyer, who doesn't know them at all? You can segment the business -- half represented by dentist referrals and half represented by patient referrals. Half will be locked into the price and down payment. The other half would be based on a measure of promise versus delivery for about two years.

Q. Roll-ups -- how do you make them more attractive?
A. A lot of small-business people are beginning to recognize the word "synergy." I've had eight deals like this around the country in the last four months -- small companies recognizing that they can gain by joining forces -- through merger, a big investor, partnership, all different kinds of ways that two businesses can come together.

When a company is acquired, we all know certain functions in both companies need not be duplicated. First is simple bookkeeping and tax accounting -- and in many cases distribution. If you can eliminate one or more of the costs of operating the smaller business, both companies are going to enjoy additional profit. And the seller is going to get more. If two companies join forces and become one, now they have the customer base to support the incremental costs of purchasing equipment. What a bonus to both of them!

Q. One way of coping with success is simply to sell the business. How do you advise people to deal with this problem?
A. You've got to decide what's best for the future of the company. For one company, I recommended they break up into five divisions -- so if they need money, they can sell off a part of the company.

There was a cosmetics manufacturer who had gotten into the national scene but could not get to the next plateau. What she did was approach companies with similar interests ... who had the distribution she needed. She sent a letter. Those people recognized she already had a name that was exciting. A deal is in process as we speak.

Q. Does sending out such letters imply any weakness on your part?
A. Such letters should go to CEOs. Always mark them private and confidential. You don't want to suggest you're on your hind legs. Make sure you get nondisclosure agreements.

Q. Do you often see deals where the buyer is a publicly owned company and part of the purchase price is in stock?
A. As soon as you get involved in selling a business for stock in another company, you have to create a whole prospectus, with the SEC as watchdog. The only caution I suggest is to make sure that -- either as buyer or seller -- you get good advice on securities law from a good law firm. If a buyer takes stock, he or she might not be able to convert to cash for a long time. Many aren't aware of that.

Q. Ira, is there a way for people to contact you?
A. They can send me E-mail at irabizlaw@aol.com.

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