The Green Sheet Online Edition
April 23, 2007 • Issue 07:04:02
The ABCs of portfolio sales
Everyone in the payments industry talks about it, but many have yet to sell a portfolio. Are you planning to sell yours someday? The purpose of this article is to give you a checklist of typical stages in a portfolio buyout. Let's assume the following about the parties involved:
- The ISO is nonregistered and works with the processor.
- The ISO has 20 agents promoting the bank's merchant services.
- The buyer wants to buy the ISO's 200-merchant portfolio.
- You own the ISO and want to sell the portfolio.
Every purchase is unique. The steps described herein will not apply to all buyouts, but they are likely to apply to many.
It's one thing to have a portfolio of merchants who generate strong residuals; it's another thing to have a portfolio in condition for sale.
Before making an offer, a savvy buyer will want to see all documentation evidencing the portfolio's existence and performance. This includes residual reports from the processor, merchant agreements for each merchant and ISO bank account statements.
Also, any responsible buyer will want you to provide all paperwork necessary to service the portfolio after the sale closes.
Unless a potential buyer offers you 100 times the monthly residual your portfolio generates, it's not wise to sell to the first person who makes an offer. The industry has a number of brokers, consultants and lawyers who can help shop a deal. Some of them will ask for a commission ranging from 3% to 8%.
When shopping a portfolio to potential buyers, be careful not to breach the confidentiality provisions of your processing agreement. It is possible to interest potential buyers without revealing confidential information concerning your ISO's identity, pricing and merchants.
All pricing is usually confidential. Initially, you will be more interested in ascertaining price ranges of various buyers than in getting specific offers on the portfolio.
3. The NDA
Before beginning formal discussions, enter into a nondisclosure agreement (NDA) with a potential buyer. While enforcing NDAs can be difficult, you owe it to yourself, the processor and the bank to safeguard all information concerning your portfolio.
In some cases, the fact that a portfolio is for sale can be confidential. Agents of your ISO might be upset to hear that the business is for sale.
4. Written offer
When a buyer is willing to pay the price you believe is best for your portfolio, have the buyer give you a written offer to purchase. An offer is not usually a binding promise to buy the portfolio.
Instead, it is an expression of the buyer's intent to do the deal within a specific period of time (such as 30 days), subject to certain standard conditions. These include due diligence, consent of processor and possibly bank, and the signing of a definitive agreement.
5. Right of first refusal
Regardless of whether the buyer is obtaining your rights to residuals only or buying the actual merchant agreements, chances are your processor has a right of first refusal to match an offer given by any third-party buyer.
As such, it falls upon you to present the offer to the processor to find out whether the processor will exercise its right of first refusal. This right is usually open for 30 days from the time the processor is given a copy of the third-party offer.
Always ask for a written confirmation from the processor stating whether it is accepting or rejecting its right to buy the portfolio.
6. Due diligence
When it is clear the processor does not want to buy the portfolio, the buyer will wish to carry out a due diligence on the portfolio. At this point, it is prudent to involve the processor; the buyer will be entering into a relationship with the processor after the deal closes.
The buyer will also depend on the processor to confirm key information concerning the portfolio, such as the number of merchants, transaction volume and the monthly residuals paid to the ISO. Due diligence often involves an on-site visit by the buyer and a thorough inspection of all agreements relating to the portfolio.
Both buyer and ISO are equally interested to know that the buyer is actually able to board the merchants into an existing or new agreement with the processor. There are a number of technical aspects to the integration process that the processor and buyer will need to sort out long before the portfolio sale closes. Poor integration will lead to attrition and losses for all parties.
8. Agreement of purchase and sale
You and the buyer will negotiate and enter into a formal agreement of purchase and sale. Such agreements vary in length, but they are all similar in essence.
The buyer pays in either a lump sum or on a payment schedule. The ISO makes representations and warranties as to the portfolio. The ISO may also make promises about the portfolio's post-closing performance and possibly agree to service the merchants following closing.
Purchase and sale agreements cannot be fully covered in this short column. I will dedicate another column exclusively to them.
9. Processor consent
Among the various consents that may be required, the processor's consent is cardinally important. The ISO should be trying to obtain this as soon as it receives the processor's rejection of the right of first refusal.
Closing is an exchange of signatures and payment of all or some of the purchase price.
11. Post-closing issues
Post-closing concerns are too numerous to list here. Some important issues pertain to agent rights on a portfolio sale, post-closing merchant support and attrition obligations under the purchase and sale agreement.
Each portfolio sale follows its own path. Yours may vary from the steps given here.
Many ISO buyouts are closed without the help of lawyers.But an ISO or buyer should retain an attorney to ensure the documents involved in the transaction actually reflect the deal the parties wish to make. When doing a buyout, try to avoid surprises.
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, e-mail Adam Atlas, Attorney at Law, at email@example.com or call him at 514-842-0886.
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