After fielding requests from ISOs interested in selling portfolios and from investors seeking to purchase them, Christopher Hernandez transitioned from ISO lending to linking portfolio sellers with active buyers. In January 2016, Portfolio Buyer launched and has since amassed a highly qualified and targeted network of buyers with no minimum or maximum restrictions on portfolio size, according to Hernandez.
The process for sellers begins with an initial questionnaire consisting of non-proprietary questions, such as number and type of merchants, name of processor, etc., which is followed by a call to discuss such things as seller motivation, whether the seller wants to retire or stay in business and work with the buyer. Non-disclosure and fee agreements are then signed.
The fees to sellers are straightforward. "The fee is very simple to calculate," Hernandez said. "There are no upfront fees. It is one multiple. If a company sells for 30 multiple, I'll get one and the selling company will get 29. For example, if a $10,000 monthly residual sells for 30 times ($300,000), the seller would receive $290,000 and we would receive a $10,000 fee. Anything over $100,000 in monthly residual income, that multiple becomes one-half multiple."
On average, the multiple on portfolio valuations ranges from 26 to 30, but can be lower for high-risk portfolios or more for top-notch portfolios. Portfolio Buyer's fee is paid out of the proceeds of the sale by the buyer at the time of closing.
Once the fee agreement and NDA are in place, the seller submits 12 months of residual statements and sales agreement, at which point buyers are contacted. Buyers also sign non-disclosure agreements with Portfolio Buyer to protect sellers. Data collected is forwarded to selected buyers for review and underwriting. Interested buyers are then connected with the seller via conference calls to discuss further details. After an offer is made and accepted, a purchase agreement is completed along with a redirection from the processor, whereby the seller changes bank information from theirs to the buyer's to allow future residual payments to revert to the buyer. Once the buyer receives confirmation of payment redirection from the payment processor, the transaction with the seller is then executed.
"A transaction means anywhere from 100 percent upfront in a few cases, but more typically between 70 to 80 percent upfront, and then depending on the structure, between 10 to 15 percent at month 12, and 10 to 15 percent as the final payment at month 24," Hernandez said, noting that to mitigate risk, buyers prefer to keep the seller vested in the portfolio for at least two years, with an attrition clause in place for the term.
A number of factors can impact the value of a portfolio and ought to be considered before entering sales arrangements. "On the low end, one is that it's high risk, meaning a high residual income, but very low merchant count," Hernandez said. "Another would be what type of merchant they are. Are they all ecommerce or are they brick-and-mortar? What their sales agreement looks like also plays a role."
High-value portfolios, on the other hand, tend to have a high merchant count, diverse range of merchants, no high concentration, low attrition rates, a solid processor, and a well-constructed sales agreement.
An important consideration is seller commitment to the buyer after the initial transaction. "Buyers love it when somebody wants to partner, to stay on board in one fashion or another, meaning either to partner or be an agent of the buyer," he said. "That helps improve value considerably. That shows they're not looking to cut and run." Having a second or third portfolio that acts as collateral against the attrition on the sale of the first one can also add to the valuation, he noted.
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