The Green Sheet Online Edition
October 27, 2008 • Issue 08:10:02
The economy and your portfolio
I'm sure most ISOs have been contemplating lately how the current state of the economy will impact the value of their portfolios. In past recessions, the payments industry has always taken pride in what it believes is a recession-proof business.
Many ISOs believe when times get tight, consumers shift from cash to credit cards and, consequently, merchant processing volumes tend to be stable, sometimes even growing during recessionary periods.
However, this recession may be unlike any we've seen before. In prior recessions, varying degrees of commercial credit were available, and people had the ability to take out equity lines against their homes.
In the current recession, credit is extremely tight, and many people's homes are worth less than the value of their mortgages, so home equity lines of credit are not an option.
Some merchant processors and ISOs are already reporting mild declines in consumer charge volumes, although no one wants to talk about it.
This leads me to ask what happens to my portfolio if consumers have no equity in their homes, can't get conventional bank loans, credit card issuing tightens up, and unemployment and foreclosure rises?
Well, I'd say if the bulk of your portfolio consists of jewelry stores, high-end spas, and upscale retail, you might be out of luck. But if the bulk of your portfolio consists of value retailers and value grocers, you may be the beneficiary of a current trend consistent with personal downsizing.
Some people are moving from the high-end organic supermarket to the low-end, value-based food market. In the current economy, individuals realize they might not have the ability to obtain additional credit, and they are planning accordingly: They are reducing their spending.
Portfolio and ISO values
What does all this mean for portfolio and ISO valuations? Well, it doesn't take a rocket scientist to figure out it doesn't enhance values. The contracting economy will manifest itself in the form of revenue attrition in your portfolio.
What does this mean in terms of selling your portfolio? Interestingly enough, I believe the multiples paid for portfolios will actually remain somewhat constant.
However, sellers, be advised that your work will continue after the sale. These days all portfolio sales include some form of seller maintenance post-transaction in which the seller is required to offset attrition by booking additional accounts.
Under normal economic circumstances, this would keep the seller busy, depending on the attrition numbers which were agreed upon by buyer and seller.
In the present economy, attrition may be accelerating faster than it has historically. Sellers need to prepare to work harder than normal to offset attrition for buyers for 24 to 36 months if they want to receive their earn outs.
So, what the change in economic times means is you may be able to get the same multiples, but you will have to work the accounts substantially harder than before.
Sellers will need to be prepared to effectively "marry" the buyer for two to three years. If you don't think you will be able to get along with a prospective buyer, regardless of the price, don't sell to that buyer; the reality is you will be working with that party to maintain accounts for the foreseeable future.
Desirable income streams
There is more interest today in small residuals and portfolios than in the last 12 months. Anyone who tells you there are no buyers out there is misinformed.
Anyone who panics while watching the current economic news and concludes that because some banks are closing, buyers don't exist for residuals, portfolios, and ISOs is, again, misinformed.
There are always buyers in every marketplace. And, if anything, I've seen an uptick in the amount of people looking to purchase a residual or portfolio.
If you think about it, a buyer for a residual or portfolio is buying an income stream. And depending on the level of attrition guarantees involved, it could be a very predictable revenue stream. There will always be buyers for revenue streams.
Prime selling time
Many of you think your portfolio, ISO or residual stream is an annuity, and you should weather the storm and sell when times are better. I respectfully disagree on many levels.
First, if your objective for selling is to put money back into your sales operation and to substantially increase the number of new accounts you are signing, there is no time like the present to expand your sales efforts.
Why work the next two years adding 100 merchants a month when you can sell your portfolio, double or triple your sales efforts and be signing 300 merchants a month? You can do the math. In this business, sitting still is a losing proposition.
For those who think they are going to get a bad price for selling now, again, I would argue that for certain portfolios, residuals and ISOs, there are plenty of buyers. And with the appropriate attrition guarantees, buyers are still paying premiums.
It actually might be a great time for you to start buying back your agents' residuals and consolidating your portfolio.
In the current economic duress, many agents may be more than happy to take a lump sum payment from you in exchange for selling the rights to their residuals.
These are not easy times, but promise exists in every type of economy. Savvy buyers and builders of merchant account portfolios will seize the day; they will find this to be a marketplace of opportunity.
Lane Gordon is managing partner at MerchantPortfolios.com, a company that specializes in marketing ISOs, portfolios and residuals for sale. Prior to MerchantPortfolios.com, Gordon spent a number of years working in the merchant processing industry. Mr. Gordon holds degrees from the Massachusetts Institute of Technology and Carnegie Mellon. He can be reached at 866.448.1885 x301, firstname.lastname@example.org, or fax 508.638.6444.
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