By Adam Hark
What a useful academic exercise it would be to cobble together the perfect portfolio: the one to which all other merchant portfolios aspire. A variation of this exercise is commonly performed through "benchmarking," an analysis of a subject merchant portfolio as compared with a premium book which is known to have carried a top valuation in the marketplace. Benchmarking is a highly effective tool for owners interested in maximizing the value of their merchant portfolios. It can show them where their portfolios are strongest and where they need improvement, as related to valuation.
But what if we were to indulge in this academic endeavor and build the perfect, most valuable portfolio? Where would we start? First, we would need to identify the top drivers of value in merchant portfolio sales. Second, we would need to know that for each of these drivers, there exists what the marketplace perceives to be the most optimal range, value, type or level.
Here are the six top drivers of merchant portfolio value in today's marketplace:
Therefore, if a merchant is lost for any reason, there is a high probability a large portion of the revenue may be lost as well. In larger portfolios, the percentage of the total revenue attributable to a single merchant account is usually much smaller, and therefore less risky to buyers.
Think of it like this: you're looking at two portfolios for acquisition, and each portfolio has 10 merchant accounts and throws off $1,000 per month in residuals. In the first portfolio, each of the 10 accounts throws off $100. In the second portfolio, nine merchants throw off a total of $100, and one merchant throws off $900. The portfolio with the major revenue concentration issue is, of course, a more risky acquisition. This example is extreme, but you can see why revenue concentration is weighted so heavily when it comes to portfolio valuation.
However, in a portfolio where a certain industry vertical has been penetrated, and consequently, a material concentration of that business type exists in the portfolio, that book will be perceived as being more valuable than a portfolio with an across-the-board admixture. Niche vertical penetration suggests there's something there beyond the payment processing, often some form of business management solution or POS technology, or specialized knowledge about a certain type of merchant. In both instances, this usually translates into "stickier" merchants, and this has a lot of value to would-be buyers.
Six or seven years ago, it was the year-over-year revenue/residual attrition. Today, you'll find a lot more buyers modeling in the credit and debit card charge volume attrition as opposed to revenue attrition because of all the new fee-based revenue mixed into the total revenue number. ISOs are constantly adding and taking away fees, which can make it difficult to extract a meaningful year-over-year revenue attrition number. However, card volume is a much cleaner number, and thus can give a buyer a much more accurate read of the true performance of the portfolio over time.
There's no such thing as a perfect portfolio, but with an insider's eye and a keen understanding of the primary drivers of portfolio value, it's not too difficult to conjure up a merchant portfolio that all other portfolios would strive to be. Here's what I think that book would look like based on the stated primary drivers of value:
If anyone knows of a merchant portfolio similar to the one described, please let me know. I'm sure I can find a buyer for it. Short of that, though, it would behoove any ISO owner or merchant level salesperson to try to build a book with similar attributes.
Adam Hark is co-founder of MerchantPortfolios.com, a dba of Preston Todd Advisors Inc. With over a decade of experience in the payments industry, Adam specializes in M&A, growth and exit strategies, and asset and enterprise valuation for payments processing and payments technology companies. Adam Hark can be reached at email@example.com or 617-340-8779.
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