By Adam T. Hark
Preston Todd Advisors
I often write about the attributes of merchant acquiring platforms that create long-term value and whet the appetite of companies that seek to acquire the same, but what about looking at your business the other way? What about looking at the attributes of your company that are abject turn-offs to the marketplace, to the point where buyers won't even consider acquiring you?
One could argue this exercise is simply a different pathway to the same information and conclusions; however, I would argue that it's not. What I'm providing here are single factors – sole attributes – of merchant acquirer businesses that can (and do) cause buyers to walk away at first blush. These five reasons that buyers won't acquire your ISO are true market killers.
Attrition or retention, however you choose to look at it, is the number one market killer. Any buyer of an acquiring platform, whose most valuable asset is its merchant portfolio, will almost without exception look first at the retention of merchants, and the effects the retention rate has on sales volume and revenue. So if at first glance a buyer sees your churn rate is high, there's a good chance that buyer will disqualify your property and move on.
That being said, one particular data trend has taken hold over the past 24 months and ought to be fully understood by both buyers and sellers before either contemplates a transaction: account attrition consistently runs higher than sales volume and revenue attrition. This means that it is possible, and I would argue likely, that a merchant acquirer with high account attrition and materially lower sales volume and revenue attrition ought not to be immediately disqualified.
This type of data trend typically indicates that the ISO is losing smaller, non-revenue producing or revenue-negative accounts, often to the Squares and Stripes of the world. As such, it's not necessarily a negative reflection on the property.
If an acquirer has a large percentage of high-risk accounts and continues to board the same, then that acquirer is likely to have a hard time finding a buyer in today's marketplace. Whether the high risk perceived by a would-be buyer is deemed to be regulatory (CFPB), bank related (transactional chargeback percentage higher than 2 percent, on average), or reputational (businesses deemed to be immoral or unethical), the acquiring property remains a "no touch" acquisition for the majority of the marketplace.
In addition, even if a buyer would be interested in a predominantly high-risk platform, the inherent nature of high-risk merchant accounts with exposure to regulatory and/or bank risk pigeonholes that property into a low valuation range, which is more often than not, far too hard to overcome to get a deal done.
Run-of-the-mill payment processing platforms – those that market to all types of small and midsize businesses and compete solely on price and customer service – lack what I call a "hook." They don't possess nor do they offer a differentiator that allows them to successfully sell to specific business verticals or groups of people.
The most successful acquirers operating today – defined by high growth and high retention – typically have a hook that allows them to access high-value, niche verticals and hold those merchant accounts, resulting in very high retention rates.
Hooks today come in multiple forms. For many merchant acquirers, hooks come in the form of specific business management software. For others, the hook can be the sales channel itself. Independent software vendor (ISV) partners who resell payments are highly sought after today for the combined technology/payments value proposition, which in turn creates a high retention situation. Even culture and language can be an effective hook. Plenty of ISOs find themselves locked into specific communities of businesses as a direct result of a shared cultural or linguistic background.
The net takeaway here is that without a hook, many buyers won't have genuine interest in investing in or acquiring your company.
Size is simple and doesn't require a lot of explanation. Small ISOs, as a function of merchant count, are not highly sought after. There's minimal, nominal growth. They also require pushing the same amount of paper in a deal as larger ISOs, but without a commensurate payoff.
Furthermore, and the primary reason small ISOs don't attract would-be buyers, is risk concentration. Small ISOs have small merchant portfolios (number of accounts), which have an inherently high-risk concentration. As such, for most smaller ISOs, the cost/benefit analysis of the buyer makes it unlikely that they'd be acquired. Growth No growth = no market interest. If your ISO is running at anemic, flat-line, or negative year-over-year, top-line growth, your proverbial goose is cooked. After all, what do you think the primary driver for acquiring your ISO is? Some might ask then what about bottom line growth? Net income? EBITDA?
Well, here's the thing, when a sophisticated buyer looks at a payments property with flat top-line growth, but decent bottom-line growth, a flag is immediately raised. The buyer is going to rip apart the P&L, looking for an explanation. In most cases, it's because the seller, in preparing the property to go to market, knew the ISO had poor top-line growth and started slashing expenses to pad the bottom line. Now, it could be argued that that in itself isn't problematic, but if the expenses being slashed are necessary for the continued operation of the business, then this strategy kills any market appeal.
There is one exception to growth as a market killer that's worthy of note. If your company technically qualifies as a payments processor but its primary product and service offering is technology for certain verticals, growth could be overlooked if, and this is a big if, your technology has the potential to produce a hockey stick shaped top-line trend line for revenue in the next 12 to 18 months. This is not something we frequently see, but we have been seeing it more and more these days as increasing numbers of ISOs are embracing technology via building it, buying it or partnering with it.
Adam T. Hark is Managing Director of Preston Todd Advisors. With over a decade of consulting in the payments and financial technology sectors, Adam advises clients on M&A, growth strategy, exits and business and portfolio valuations. He can be reached at email@example.com or 617-340-8779.
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