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Mergers and acquisitions (M&As) have played an important role in the life cycle of many nursery businesses. An M&A transaction can help an operation expand, move into new areas and become more efficient with one simple transaction. For many businesses an M&A is a proven strategy for cutting overhead costs, increasing efficiency or battling a larger competitor.

Whether the recent spate of M&As within the industry is attributable to last December’s Tax Cuts and Jobs Act (TCJA), the cash it freed up or the new lower corporate tax rate, M&As are on the upswing with a great deal of the action involving smaller deals.

Viva la difference

While often synonymous, the terms “merger” and “acquisition” are separate transactions. A merger occurs when two separate entities combine forces to create a new, joint organization in which both (theoretically) are equal partners.

An acquisition refers to the purchase of one entity by another. A new nursery does not emerge from an acquisition, rather, the acquired business, or “target,” is usually consumed and ceases to exist with its assets becoming part of the acquiring business.

M&As can include other transactions, including:

• Consolidation: This creates a new entity where shareholders in both entities approve the consolidation, after which they receive equity shares in the new firm.
• Tender offer: One business offers to purchase the outstanding stock of the other business for a specific price. The acquiring business communicates the offer directly to the other business’s shareholders, bypassing the management and board of directors. This usually involves larger, often-publicly-traded businesses.
• Acquisition of assets: One business acquires only the assets of another firm. Asset purchases are common during bankruptcy proceedings, where other businesses bid for various assets of the bankrupt business, which is liquidated after the final transfer of assets to the acquiring business.

Paying for it all

Because M&As are expensive, adequate funding is a necessity. Fortunately, financing and M&A transaction with stock is both safe and relatively inexpensive option since both parties sharing the risk. In a typical share-exchange transaction, buyers exchange shares in their own business for shares in the selling business. Paying with stock is advantageous for a buyer, especially if their shares are overvalued.

In a merger, shareholders on both sides can reap long-term benefits from a stock swap as they usually receive an equal amount of stock in the newly-formed operation, rather than simply receiving cash for their shares.

Paying with cash is the most obvious alternative. Cash transactions are instant and relatively mess-free and usually don’t require the same kind of complicated management as stock would. Unfortunately, smaller nurseries, without large cash reserves, must usually seek alternative financing options in order to fund their transaction. One popular alternative to paying for an M&A with stock or cash involves agreeing to take on the debt owed by a seller.

Assuming the burden of debt

For many nursery operators, debt is the reason for the sale. Debt all-too-frequently reduces a seller’s value, often to the point of worthlessness. From a buyer’s point of view, this strategy offers a relatively cheap means of acquiring needed, additional assets.

Being in control of a large quantity of an operation’s debt means an increased management role in the event of a liquidation since owners of debt have priority over shareholders. This can be another incentive for would-be creditors who may wish to restructure the new business or simply take control of its assets.

Mezzanine financing

Mezzanine financing is a hybrid of debt and equity financing involving senior debt such as loans from sources such as banks, secured by liens on specific assets of the nursery or growing business. Equity is usually in the form of preferred stock, but buyers aren’t usually required to give up as much control to lenders.

The size of the mezzanine finance industry has grown in recent years. In fact, quite a few mezzanine groups have been sponsored by the SBA. But, that’s not the only way the SBA can help in an M&A transaction.

The SBA

Many M&As and owner buyouts of private, rather than publicly-traded businesses, qualify for SBA loan guarantees. The SBA’s 7(a) program is the most popular loan program, providing up to $5 million for refinancing, working capital or to buy a business. Even larger transactions are possible with so-called “mezzanine” financing or when real estate is included.

The large component of goodwill and the lack of tangible assets so common in smaller M&A transactions isn’t a deterrent. The SBA’s programs focus on lenders where minimal collateral is acceptable, especially when there is strong cash flow and mitigating factors such as management expertise involved.

SBA M&A financing is generally through the SBA Preferred Lender program, often with additional working capital loans and lines of credit for financing packages in excess of $5 million. Since the SBA has eliminated its personal resource limitations, borrowers and investor groups with high net worth and liquidity are now usually eligible.

Insurance

Much of the risk normally associated with M&A transactions can be eliminated with an often-overlooked type of insurance. First introduced in the 1970s, Warranty and Indemnity (W&I) insurance has evolved into a popular and sophisticated tool for protecting buyers and sellers from financial losses in M&As.

W&I insurance essentially removes the risk, in whole or in part, with the promise that insurance underwriters will be standing behind the warranty claim. However, by offering more protection against downside risk, W&I insurance also negates the requirement for the use of escrow or indemnities, providing certainty and finality to both parties.

With a seller’s W&I policy, the seller gives warranties and indemnities as is customary, but then insures its own risk of a claim. Sellers remain liable to the buyer, but they are indemnified by the insurance underwriter. Thus, should a claim occur, the buyer would usually claim against the seller for breach of warranty, but the seller would look to the insurance company to write a check for all, or at least part, of the damages being sought.

A buyer’s W&I policy covers damages following breaches and/or fraud as well as defense costs. With a buyer policy, if the seller commits fraud, the policy would still payout. Because the buyer is the insured party and it has not been fraudulent, nor has it fallen afoul of its disclosure obligation to the insurers, W&I insurance provides an extra layer of protection for buyers.

Taxing the M&A

Despite the new, lower 21-percent corporate tax rate, many nurseries are likely to continue pursuing tax-free M&A transactions. Tax-free M&A transactions are considered “reorganizations” and similar to taxable deals except that in a reorganization, the buyer uses its stock for a significant portion of the sale price rather than cash or debt.

Reorganizations, while not usually taxable at the entity level, are not completely tax-free to the seller. A reorganization is immediately taxable to the target’s shareholders for any “boot” received. Boot is any consideration received by shareholders in the target entity other than the buyer’s stock.

Other provisions of the TCJA, such as the full-expensing of asset costs, may cause many to weigh their effects on any transaction. The ability to do a taxable asset transaction and take advantage of front-loaded deductions may encourage growers to complete a taxable deal instead of a tax-free transaction.

Consider a situation where a seller really wants cash while the buyer is pushing for a tax-free acquisition. The tax law’s Section 338 permits a nursery to make a “qualified stock purchase” of another business and choose to treat the acquisition as an asset rather than a share acquisition. The stepped-up basis in the qualifying assets can be immediately expensed and written off, dramatically changing the bidding dynamic on the transaction.

Recent trends involve more cash-ready buyers, but with more aversion to risk. Buyers are generally unwilling to enter into transactions if the warranty package is too limited or there are concerns over enforceability of those warranties.

These challenges are not insurmountable, and deals continue to emerge with and without tax breaks, alternative financing and risk insurance. But every nursery owner would be well advised to perform their due diligence and seek professional advice.

Mark’s tax and financial features have appeared in leading business magazines and trade journals for more than 25 years.

There are many insecticides and miticides on the market and more new products are delivered each year. Each new product may offer improved efficacy, lower human toxicity or both as selling points compared to older products. Increasingly, new insecticides and miticides also strive for compatibility with biological control programs by combining efficacy against pests with safety for natural enemies.

These are great strides and most products arriving on the market lately are much safer for everyone and everything involved than the old organophosphates, organochlorines and other products they replace. However, the rapid introduction of these advanced insecticides and miticides should not overshadow horticultural oils and insecticidal soaps that have always been, and continue to be, essential tools in an IPM program.

Horticultural oils and insecticidal soaps have been used for decades, even centuries, to manage pests in all sorts of crops. Horticultural oils are refined petroleum products. If you have been in the business for a while you may recall learning about dormant oils, which were only applied to dormant plants in winter, and summer oils which were lighter weight and applied during the growing season. This is not the case anymore. Today, most horticultural oils are highly refined to improve mixing and application, and to reduce phytotoxicity. The same horticultural oil can be applied to dormant plants and growing plants, just at a higher rate to dormant plants.

Insecticidal soaps are potassium salts of fatty acids. I don’t know what that means either, but I know they are different from soap you use to wash your face or your dishes. Yes, there are many recipes online to make your own insecticidal soap, but to have confidence in the efficacy and crop safety of what you are spraying, it is worth purchasing the real thing. An advantage of insecticidal soaps and horticultural oils is that they are relatively inexpensive. So, spring for a reputable product.

The process

We have come to rely on systemic or translaminar, long-lasting, pesticides for managing insect pests like aphids, whiteflies and mealybugs. Horticultural oils and insecticidal soaps are not systemic or long-lasting. In fact, once oil or soap dries on a plant it has no killing power. So why use them?

The advantages of horticultural oils and soaps comes from their low cost, safety for people and natural enemies, and, in many cases, good efficacy. The human safety of these products means that restricted entry intervals (REI) can be four hours or less, depending on the product and label, so you can get back to work sooner. Another advantage of their safety is that they can be integrated into biological control programs. They do not leave a toxic residue on plants so natural enemies can be released the day after an application is made. This allows you to reduce pest populations and start clean to give natural enemies the best chance to perform. In addition, many natural enemies are less susceptible to oils and soaps than the pests you target. So even spot applications with natural enemies present should kill more pests than predators.

Targeted pests

Every pesticide has disadvantages. Horticultural oils and soaps are primarily effective against small, soft and slow arthropods. Luckily this includes a lot of the key pests you battle including aphids, whiteflies, mealybugs, thrips, spider mites and scales. Horticultural oils and soaps are less effective against large or hard-bodies pests like beetles and caterpillars. However, even for the ideal soft and slow pest like aphids, timing is important. This is because it is easier to reduce small populations than large populations and easier to kill small young pests than older ones that may be less susceptible (this applies to all pesticides). For example, horticultural oil or soap will be better at killing young spider mites than older ones. Even though young and old mites are both relatively soft and slow, young mites have a softer exoskeleton and less hair to block the product and are easier to suffocate because they are smaller. Think about mealybugs. They get waxier as they get older and are thus better protected. Not mention that heavy mealybug infestations contain so many bugs that they are layered on top of each other and have found their way into every hidden spot on the plant so more of them are protected from your application.

Horticultural oils and insecticidal soaps are effective against a similar array of pests. Remember small, soft and slow. Scale insects are a unique group of pests that are frequent targets of oil and soap applications but even though they are small and slow may be covered in tough armor. Recent research from Cliff Sadof’s lab at Purdue University shows that the type of scale insect matters when choosing between horticultural oil or insecticidal soap. The reason has to do with scale insect morphology which we should cover very quickly.

Scale insects are common pests that feed on plant fluids. The most common types are armored scales that have a hard, waxy cover and soft scales that have, you guessed it, a softer cover. Scale insects do not move much. Armored scales move once in their life as newly hatched nymphs called crawlers. These tiny scales crawl from beneath their mother’s armor, with no cover at all, to find a place to feed. Then they settle, insert their mouthparts into the plant, and start sucking out juices. Many soft scales can move a little as adults, but they still have tiny unprotected crawlers that hatch from eggs and have to find a place to settle and feed.

What does this mean for management? Armored scales like euonymus scale, pine needle scale, false oleander scale and many others have a cover with a high percentage of wax. Wax repels water. Thus, horticultural oil is more effective against armored scales than soap which does not cling to or penetrate armored scales’ waxy covers. In contrast, insecticidal soaps often perform better on soft scales. Their covers contain less wax and more sugars from the honeydew they produce. Thus, the water and soap solution can coat and penetrate them better than an oil solution that would be repelled by the water content of soft scale covers.

IPM toolbox

The critical thing for managing scale insects and most pests is classic IPM techniques of scouting, monitoring, and record keeping to determine when pests are present and in susceptible life stages. So even though armored and soft scales have different susceptibility to horticultural oils and insecticidal soaps they both have tiny unprotected crawlers. These can be killed by anything. In the wild, rain is one of the greatest causes of scale crawler mortality. So, if you are monitoring for scales and notice when eggs are hatching any product will do. Then you may want to follow up with another application in a week or two to reduce the abundance of those that hatched after your first application.

Horticultural oils and insecticidal soaps can be valuable tools in your IPM toolbox. They may not be as effective or long lasting as other more toxic pesticides, but the price is right. Oils and soaps have important roles to play in reducing pest pressure and lower risks for you and your workers and your biological control program.

Steve Frank is Professor and Extension Specialist in the Department Entomology and Plant Pathology at North Carolina State University. You can reach him at sdfrank@ncsu.edu. For more information on nursery and landscape IPM visit http://ecoipm.org.

From a business perspective though, higher labor costs mean lower profits. Rising wages also place upward pressure on inflation, forcing the Federal Reserve to raise interest rates faster to keep inflation near its two percent target. Capital costs for businesses are increasing. Fiscal stimulus measures, both tax cuts and increased government spending, helped support growth in 2018 but are also stretching the capital and labor resources of the economy and will provide less support to growth in 2019 as their effects taper off during the year.

Recent equity market volatility, and the fall of key business confidence measures to levels signaling a slower pace of growth, demonstrate that firms will face a more uncertain business environment in 2019 relative to 2018. GDP growth is likely to fall from a high of above four percent growth during the second quarter of 2018, to 2.2 percent by the end of 2019, near its long-term trend.

An aging population means slower labor force growth, especially among workers in jobs not requiring college degrees who are retiring in large numbers. To compensate, firms will have to help workers become more productive through well-chosen investments and improved business practice. Between 2019 and 2028, the U.S. economy is likely to average 2.1 percent annual growth, a figure that can be reached only if businesses overcome demographic headwinds by finding innovative ways of boosting labor productivity.

Source: The Conference Board, www.conference-board.org, published with permission.

About The Conference Board, Inc.: TCB is a global, independent business membership and research association working in the public interest. Its mission is to provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society.

TCB assembles, analyzes and disseminates information in regard to economic conditions and management experience in the United States and other countries.

The upheaval in today’s economy has given a rebirth to the basic dynamics of successful business management. Easy to ignore in good times, the time-honored rules of profitable business management are a critical component in the recipe for building sales and profits when the going gets tough.

Here are 10 commandments of successful business operations that can help you and your nursery survive and prosper in this or any economy.

1 | Never allow any of your money to lie idle.

Making the sale and collecting your invoice is only half of the job of professional money management. Once you’ve collected your money, it’s important to manage it skillfully.

If you don’t already have a money market account at your bank, open one and have it linked to your business checking account for telephone or online transfers.

Deposit all daily receipts into the money market account where they will immediately start drawing interest. Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks to be written. Banks have made this procedure so easy to use that there is no longer any reasonable excuse for not taking advantage of it.

Keeping all of your money working for you all of the time is an important part of professional business management.

2 | Be aggressive collecting accounts receivable.

Never allow your accounts receivable to go untended. You've earned that money; you have a right to it; you need it.

Dunning late-paying customers may not be your favorite pastime, but close monitoring of your accounts receivable file and following through on late payments is as important to your financial success as the quality of the services and products you offer. If your customers learn that you are cavalier about money owed to you, then you can be certain they will stretch your patience (and your cash flow) to the limit.

3 | Don’t be in a big hurry to pay your bills.

There's good reason why checks are slow to come in from people who owe you money. It’s because hanging on to cash as long as possible keeps that money available to draw interest or to work in the business.

That’s why it’s important to set up a system to pay your bills the smart way. It's easy to do and it moves you up another rung on the ladder of professional cash management.

Never jeopardize your credit standing by paying bills late. Pay your bills just before they’re due not long before, not after. It’s especially important to avoid late payment on credit card bills because of the oppressive penalties that most banks are now putting into place.

4 | Adopt a marketing mentality.

If customer satisfaction is the mashed potatoes, marketing is the gravy.

But keep in mind, marketing involves far more than an ad in the newspaper or a fancy website. Marketing is a complex challenge, all the more so in a business operating in a specialized niche such as yours. If you are to achieve optimum success in marketing your nursery, you must be willing to spend time studying, reading, and analyzing your market and your competition.

Keeping your business healthy and profitable requires an ongoing marketing program. There is no other way. Competitive prices alone won’t do it; quality products alone won’t do it.

Marketing embraces all facets of your operation. To be an effective marketer, you must nurture and promote your business image, sell yourself as well as your business, and concentrate on making your nursery the best choice for discriminating customers.

5 | Determine that you will never lose a client to a competitor.

Numerous studies over the years have shown that, on average, it costs five times as much for a business to find a new customer than to keep an old one. Focus on the significance of that statement; it is one of the most powerful concepts in the world of business.

With competitors standing ready and anxious to snatch away your customers and prospective customers, and your awareness of the cost of replacing a lost customer with a new one, it should be easy for you to understand the importance of never giving even one customer a reason to stray.

Once a customer does business with you for the first time, you’ve done the hard part. Now, your job is to instill the notion that doing business with you will always be a satisfying experience.

You and your employees must never lose sight of the fact that developing a new customer is a costly and difficult job. Once a stranger becomes your customer, a major part of your overall marketing program must center on ways to make sure that he or she never has reason to leave you for a competitor.

6 | Keep leasing in mind.

Most financial advisors agree that leasing products like cars or vans for personal use is usually not financially advantageous. But business is a different animal entirely.

The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment. It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing.

Talk to your tax advisor about this the next time you’re considering a large capital purchase.

7 | Go the extra mile.

Never forget that a complaint from a customer can easily be converted into a valuable asset. Some years ago, a major retail marketing study revealed that customers whose complaints were satisfactorily resolved became better customers of the company than they were before the incident that triggered the complaint.

Some of the most successful companies in the world have been built on a foundation that revolves around the principle that customer complaints provide a valuable opportunity to build the business.

When L.L. Bean, founder of one of the world’s most successful catalog order firms, was starting out, he suffered what could have been a disastrous setback. Shortly after he began shipping his first waterproof, hand-made boots, complaints that the boots leaked started coming in from customers. Determined to fulfill his promise of customer satisfaction, Bean returned the full purchase price to every customer. Then, he set out to correct the flaw in the boot’s design. That was the beginning of the customer loyalty that helped to make L.L. Bean what it is today.

Sometimes, satisfying a customer complaint calls for measures that you may feel unreasonable. When that happens, think of the cost in time and money as an investment in your future.

Once you’ve sold yourself and your employees on why you are the best choice for customers who require the utmost in dependability and quality, you must focus your marketing efforts on ways to promote this image to both customers and prospects.

8 | Set your business apart.

America’s most successful entrepreneurs, gigantic or tiny, are those who have carefully developed an identity all their own. Your job is to evaluate your strengths and then combine them to form a unique identity an identifiable image for you and your business.

Perhaps you’ve been in business longer than your nearest competitors, or maybe you have a reputation for wide-ranging inventory or knowledgeable staff. Whatever your marketable strengths, you should write them all down, study them, and then determine how to separate yourself from your competitors how to motivate potential customers to seek you out, and existing customers to feel fortunate to have discovered you.

9 | Guard your most precious business asset.

Whether you have a few employees or a few dozen, they form the bedrock of your business. While adequate wages are a fundamental requirement for employee satisfaction, money isn’t the only motivation for most workers. Recognition for a job well done and respect for individual effort are important contributors to low employee turnover and high productivity.

Non-financial rewards such as company picnics, employee-of-the-month programs, suggestion boxes with rewards for usable suggestions, and other incentives are valuable at any time; but they take on special importance when circumstances limit your ability to increase wages.

10 | Develop a personal relationship with your banker.

Handling money is a banker's job, and most are very good at it. Even if your operation is relatively small, it's a good idea to develop a personal relationship with the manager at the bank where you do business. Discuss your financial picture honestly with the manager of your local branch. You'll get some good ideas and a favorable ear should you ever need a little financial help.

To some nursery owners, a tight economy means going into hibernation. To others, it’s a time to increase customer loyalty, solidify market position, and attract new customers. Following these 10 commandments of successful business operations will help you to turn any time into good times.