By Richard A. Sachs
For an agent or ISO, building an impressive merchant portfolio can take many years and a breadth of industry knowledge. And once this level of success is achieved, a portfolio can be worth even more to the larger financial companies shopping for promising portfolios. But even for those with a lifetime of industry experience, understanding the residual purchasing process can be unfamiliar territory.
Before considering any offers or actively pursuing a procurement partner, you, as an ISO or merchant level salesperson (MLS) should weigh a number of factors. I've outlined 10 critical considerations involved in buying and selling portfolio residuals. This article strives to reflect the industry at large, but remember, every company is different in how it prospects, appraises and structures deals when acquiring portfolio residuals.
Every company has its own methodology when appraising a portfolio. Multiples for the payout can range between 18 and 40 times the monthly residuals being acquired, with an average between 24 to 36 times. The final figure will depend on a number of variables, such as ratio of brick-and-mortar to card-not-present retailers, merchant retention history and average monthly residuals. For sellers, it's best to research which companies are interested in purchasing residuals that most align with your current portfolio and therefore present the most favorable offer.
Not only is it unnecessary to sell all your residuals at once if you wish to maintain a monthly allocation, but most companies aren't interested in purchasing everything in the initial offer. Our acquisitions team usually seeks to procure half upfront and the other half one or two years later, depending on the deal's structure. Some companies have a shorter time frame or none at all on full acquisitions. It's best to enter the process with the understanding that you may retain and independently manage a portion of your portfolio.
Most companies purchase residuals without requiring or even requesting that an ISO or MLS make changes to customer-facing aspects of operations, including the seller's business name. Purchasing companies understand that, if they find a portfolio is desirable for acquisition, it means it has been well managed and maintained.
The last thing they want is to challenge a comfort level attained among satisfied merchants. The most desirable outcome is always one that allows for "business as usual" for the ISO or MLS and the merchants.
Most deals are structured so that a full portfolio's residuals are redirected to the purchasing company. Therefore, the ISO or MLS receives a payout of the remaining residuals the seller still owns. Thus, after receiving the initial payment, it's in the seller's best interest to maintain a healthy portfolio so the payout remains at or above where it was when the residuals were sold.
For some, a huge concern is combating attrition as they continue to operate as their own company and receive the residual payout. This may be because they are concerned that their merchants' service needs may no longer receive the same level of attention. A more involved acquiring company has a large enough infrastructure to fully support customer service. However, this is usually not a mandated aspect of the deal.
If the customer service you provide is a primary aspect of your merchant management, consider maintaining this after the sale, but also be aware that some companies may put a value to the inclusion of their own customer service when making you an offer.
Your monthly residuals may look impressive, but an investment to acquire them essentially creates what is anticipated to be a long-term commitment between your merchants and the acquiring company. Your portfolio's value is therefore dependent on the stability, conventionality and vitality of your merchants' various businesses.
A portfolio of brick-and-mortar retailers will, for example, likely obtain a higher multiple for acquisition; a portfolio consisting solely of online merchants and e-commerce residuals might bring in a lower offer.
The type of merchants you maintain and your total monthly residuals are important factors in the portfolio evaluation and appraisal process, but your history with the merchants is also key. You may have hit a peak in sales, but that doesn't necessarily mean it's time to sell.
Acquiring companies will likely want to see your merchant history dating back 12 months, and your attrition rate will be a deciding factor in whether they are interested in purchasing. Since client retention is such an important aspect of your portfolio's value, make sure you don't have a significantly high attrition rate within the previous year before putting your portfolio on the market.
Just as you'll find with any financial investment, the paperwork and files requested will be significant – from the research and due diligence on the acquirer's part to the final legal agreement. Interested purchasers will first sign a nondisclosure, then request organized statements dating back at least one year, if not longer, which will be meticulously reviewed and verified.
They will want copies of the current legal agreements between you and your processing platforms to understand what percentage you receive from processing fees and to examine any stipulations, such as expiration dates or challenges to the acquisition or redirection of residuals, that may impact the deal.
For ISOs with monthly agent payouts, it's often thought that their business model would negatively affect their desirability among prospective purchasers, or their ability to sell at all. But agent payouts matter little if your portfolio is solid and well managed.
Although a company will likely only buy a portion of your residuals at first, the entirety of your residuals will reroute through its processing stream, meaning your remaining residuals will, from then on, be routed to you from that company. The same will go for your MLSs. The acquiring company will take its guaranteed residuals, then pay all of your agents' guarantees, then you will receive what remains.
This process will remain until the full portfolio of residuals is purchased, or however else the agreement stipulates. In most cases, your MLSs will then receive the opportunity to stay on with the acquiring company and build a new portfolio. There may occasionally be exceptions that would allow you to continue to pay your agents, so long as that payout process can be verified each month.
Some MLSs have merchants on a variety of processing platforms. And although together they may equal an attractive residual imbursement, potential acquiring companies will look at each processing platform you work with as a separate portfolio and purchase only those that appeal to them. Although purchasers may be interested in more than one, it might make the most sense for you to spend time building each up individually, or focusing at first on the most promising portfolio, if their value and potential is not well distributed.
The more your portfolio earns, the better the offer you'll receive. But some MLSs are surprised to find that their smaller portfolios aren't attracting any prospects at all. Because of the level of risk, research and labor-intensive effort involved in the acquisition process, larger companies often set a minimum monthly recurring residual prospects must maintain for purchase consideration.
A good company will offer you options and might be able to recommend you to a company better suited for a portfolio of your size. Some might offer you a credit line and an opportunity to become a strategic partner and process through their platforms.
I hope these guidelines provide a good foundation for understanding the primary aspects of any acquisition. But the most important aspect of any prospect is integrity. Because of the ease and frequency of fraud in the payments industry, even the language in a contract is not enough for an acquiring company to feel confident of your interest in protecting and maintaining its investment. Due diligence will include an examination of your past dealings and industry relationships, and likely, conversations with mutual associates.
In the end, the evaluation of your integrity will be the number one factor in determining the level of interest you will garner from prospecting companies, so if professional integrity is an aspect of your selling proposition, you're off to a great start.
Richard Sachs is the Director Portfolio Acquisitions for TouchSuite, one of the country's foremost payment technology companies. You can reach him at email@example.com.
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