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Table of Contents

Lead Story

Industry self-policing: A lofty goal?

Patti Murphy
ProScribes Inc.

News

Industry Update

Federal Reserve sets debit interchange at 21 cents

Visa to update forecast after Fed sets debit interchange

More regs, requirements from FFIEC, PCI council

Fraudsters nailed, proactive security initiatives needed

The 25 most dangerous software errors in 2011

Features

Wal-Mart wants to bank the underserved

Patti Murphy
ProScribes Inc.

Microfinance and profits

Patti Murphy
ProScribes Inc.

Electronic billing for SMBs

The three R's of text message marketing

Pal Flagg
Street Savings

ISOMetrics:
Breaches across America

Selling Prepaid

Prepaid in brief

Is the new AmEx prepaid card a game changer?

Case study: Prepaid electricity metering

Views

Are you ready for the NFC paradigm shift?

Scott Henry
VeriFone Inc.

Education

Street SmartsSM:
Networking groups and referral marketing - Part 1

Bill Pirtle
MPCT Publishing Co.

Use communication to cut merchant attrition

Jeff Fortney
Clearent LLC

Finding the right payment processor

John Barrett
First Data Corp.

Social media: Putting your company's best face forward

Peggy Bekavac Olson
Strategic Marketing

What is my portfolio worth anyway?

Adam Atlas
Attorney at Law

Company Profile

Capital Access Network Inc.

New Products

Award winning loyalty technology

Paycloud
SparkBase

Less churn, more earn in health care

Revenue Maximizer
TransEngen Inc.

Inspiration

Make children your business

Departments

Forum

Resource Guide

Datebook

A Bigger Thing

The Green Sheet Online Edition

July 11, 2011  •  Issue 11:07:01

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Legal ease
What is my portfolio worth anyway?

By Adam Atlas

Sooner or later, ISOs and merchant level salespeople (MLSs) sell their portfolios or businesses. Long before a sale ever becomes an option, it's useful for payment professionals who are developing merchant portfolios to think about the factors an objective purchaser might take into consideration when preparing an offer to purchase a portfolio.

The purpose of this article is to list a number of criteria that are often used at least as part of the basis for portfolio valuation.

While the criteria I've identified tend to apply for sales at almost any level of our industry, let's assume I am discussing the sale of a portfolio of merchants solicited by a registered ISO that has a direct relationship with a large processor, such as First Data Corp., Global Payments Inc., Chase Paymentech Solutions LLC, TransFirst LLC or First American Payment Systems LP, among many others.

Seven important considerations

The following list is not necessarily in the order of importance and will not necessarily include all the criteria that might apply to your individual situation.

  1. Residuals: How much revenue does the ISO's portfolio bring in per month - total and per merchant? From the outside, this may seem like a simple question.

    But in the heat of a purchase negotiation, many issues arise, such as whether annual fees are in or out and whether Payment Card Industry Data Security Standard compliance or IRS reporting fees count.

    Then, there are ancillary residuals, such as those for equipment, gift cards and gateways. Also, the ISO has to decide whether it wishes to be paid on the gross amount of residuals that it receives or some lesser amount, such as the gross amount less payouts to agents.

    It's safe to say that once the parties agree on an objective method of calculation, the dollar value of monthly residuals will be the greatest single indicator of the purchase price of a merchant portfolio.

  2. Attrition: Attrition is the rate at which a given volume of residual revenue on a portfolio of merchants declines; it is usually measured on an annual basis and represented as a percentage of the loss of revenue based on the revenue of the portfolio one year before the measuring date. Attrition is affected by myriad factors, such as how the sales were made, pricing, standard industrial classification (SIC) codes, service and many others.

    Naturally, a buyer will prefer that attrition be low. However, some businesses tolerate a high level of attrition.

    For example, if you are an ISO selling in-person to brick-and-mortar merchants and you provide face-to-face service, chances are you will have a lower attrition rate than if your ISO consists of a call center responding to Google Inc. AdWords placements and relying on minimum monthly fees for a large part of your residuals.

    Those are two examples to illustrate extremes or, more importantly, illustrate the fact that there is no single attrition rate that fits all ISOs.

  3. Attrition guarantee: If only to guard against a dishonest seller, many purchasers will look to sellers to guarantee some or all residuals that are sold for some period of time after closing.

    The precise amount, duration and nature of such a guarantee will have an impact on the purchase price. This is an important extension of calculating the attrition rate in the first place.

  4. Contractual rights: A great portfolio is not worth much if you have no right to sell it in your underlying agreement. The right of an ISO to dispose of its rights in respect to merchants, as per the ISO's written agreement with its processor, merits an article all of its own, but it will suffice to say here that such rights vary greatly from ISO to ISO.

    Some ISOs have no express right to sell any of their rights (not even residual rights), while other ISOs have the right to cause the acquiring bank to assign its right and obligations under merchant agreements to another bank.

    Where you lie on this spectrum will be dictated by your agreement and will also have an impact on the value of your business.

    Think of the difference between selling a new car with wheels and one without them, and you will quickly appreciate the value of having the right to portability spelled out in an ISO agreement.

    Let me be clear, whatever portability rights are granted exist because there has been some measure of negotiation and some consideration given by the ISO to the acquirer for the rights it has.

  5. Merchant mix: There is no right answer to what the right mix of merchants might be in any given portfolio. However, the mix will influence the valuation, especially in the eyes of the purchaser. For example, a conservative, low-risk investor will be reluctant to invest in a portfolio of high-risk merchants.

    Also, some SICs are more attractive than others. For example, on the same volume and revenue, a restaurant is more attractive than a merchant, such as a furniture store, that accepts orders for future delivery, because the right of bankruptcy and heavy chargebacks are very real for the latter type of merchant.

  6. Platform: Obscure or difficult to use platforms make their hosted portfolios less valuable. If only by narrowing the pool of potential purchasers, the platform on which a portfolio resides is a factor to take into consideration when evaluating a portfolio. Don't forget, a purchaser is also thinking of his or her eventual exit (after the purchaser pays off the loan used to purchase your portfolio).

  7. Ongoing seller involvement: Portfolio purchasers usually pay more for a portfolio when the seller agrees to solicit merchants for the purchaser after the closing of the purchase. There are a number of reasons for this.

    First, this is an indirect way of obtaining an additional measure of guarantee on the seller's nonsolicitation agreement (that is, it polices promises made by seller to not re-solicit the business of merchants just sold as part of the portfolio). Second, why buy just an egg when you can get the whole goose?

The ultimate objective

This list is not comprehensive. Each transaction has unique characteristics that will lead the parties to a deal that is acceptable to both.

As a general rule, if the purchaser explains, on a rational basis, the method by which he or she proposes to evaluate the portfolio, that will relieve a lot of anxiety on the part of the seller, who might otherwise be faced with an abstract price and no discernible basis for understanding how it was calculated or how to proceed with negotiations.

All ISOs and MLSs could benefit by reflecting on how their day-to-day practices contribute to the ultimate value of their businesses. Payment professionals are in this for a profit, after all.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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