The Green Sheet Online Edition
March 24, 2008 • Issue 08:03:02
Weeding out bogus buying offers
Most owners of ISOs likely started out with the goal of building and eventually selling either their entire business or portfolio. You'd be hard-pressed to find too many other types of businesses that are conceived and built with an eye for selling from their inception.
For this reason, the merchant processing arena is truly a unique marketplace, where someone who started an ISO in a spare bedroom may now be looking at a multimillion dollar payday.
There are more people who have fulfilled the American dream of constructing small empires in this business than any other that I've encountered.
As most folks have a build-to-sell mentality, it's a foregone conclusion that the one aspect of their portfolio they want to understand is what type of valuation they can assign to it, which is most commonly articulated as a multiple of net monthly residual.
With this in mind, I'd like to shed some light on truly being able to understand what constitutes a real offer, as opposed to a prospective buyer just throwing an unsubstantiated price at you in casual conversation.
There are three key components which are essential to every successful ISO or portfolio sale:
- Price (multiple)
- Ability to consummate
If any one of these three components is missing, the deal won't be sound. It seems obvious to include all factors in a proposal, right? You would be surprised how many offers lack at least one of these elements.
Time after time we listen to colleagues tell us someone has made them a very aggressive offer with a high multiple of net monthly residual, yet the structure of the deal and funding seems conspicuously ambiguous, if not entirely absent.
Lucky number three
I would like to challenge the conventional belief that an offer based on the price, whether it is made over cocktails or over the phone, is somehow substantially a real offer. Too often sellers hear a multiple and proceed to use it as a basis for valuation, as well as a basis to try and solicit better offers. Price is only one component of an offer and, ultimately, of a successful sale.
Without thoroughly analyzing the terms and the buyer's ability to consummate, which includes the record of successful acquisitions and current funding sources, the price offered is meaningless.
Here's an example: Let's say you are selling a vanilla portfolio - fully portable, primarily brick and mortar accounts, annual attrition less than 5 percent, not top heavy (the top 20 percent of accounts produce under 30 percent of revenue), throwing off a net monthly residual of $200,000.
Let's assume that you've received four offers as outlined in the chart accompanying this article.
All of the offers are subject to maintaining revenue above threshold attrition levels. Buyer 1 is offering the lowest gross multiple but the highest amount of cash upfront.
But this offer does not allow you to load accounts to the portfolio to maintain your attrition requirements. Buyers 2 and 3 offer higher gross multiples but substantially less upfront cash. They do, however, allow you to add accounts to mitigate attrition.
Buyer 4 may allow for bragging rights in terms of gross multiple, but it represents the least amount of money upfront with a payout that is very much weighted at the end of 24 months. This buyer does not allow you to load accounts to maintain residual levels.
Is there a clear winner? Is it obvious which deal is the best? Should you take the 45 multiple, since it was the highest offered? You get the point; price isn't the be-all and end-all. What does it mean to get a high multiple if the majority of the money isn't seen for at least 12, 24 or, perhaps, even 36 months?
Despite the tightening of the credit markets, there still are plenty of quality buyers out there. But some of the deal terms specifically relating to structured pay-outs appear to have stretched out in time.
Terms in depth
Has the buyer consummated a transaction before? Who is the funding source? A very peculiar thing seems to happen between the time buyers make casual offers, when they put together term sheets and when their finance committee gets ready to approve purchase agreements.
When people get ready to take out their checkbooks and pay for something it never ceases to amaze how rapidly things can change. Purchase agreements may look significantly different than term sheets.
The finance committee gets to have its say before it releases funds for the acquisition, and it may decide to make alterations that disadvantage the seller.
The committee may not change the multiple or the general terms, but it may decide to disqualify specific accounts within the portfolio based on performance over time.
For example, if your portfolio has a measurable portion of nonprocessing accounts, as many do, be prepared to have them peeled out of the transaction or, at the very least, take a significant cut on the multiple that was originally assigned to those accounts.
You would think that these types of scenarios would all have come out prior to putting together the term sheet, but again when it comes down to the point where someone is about to write you a large check, you'll be amazed how many new issues arise.
And, of course, there are the offers from buyers who haven't consummated a transaction or whose funding sources are questionable, at best.
I think we all know what those offers are worth. If the highest multiple is from a questionable buyer, then the multiple is worthless. Regardless, sellers still choose to selectively remember the highest multiple offered.
It all comes back to price, terms and ability to consummate. Before you, as a seller, can begin to benchmark offers, you've got to validate the buyer's ability to complete the transaction, and then try to compare the terms offered from other legitimate buyers. This way you can ultimately work at comparing real offers.
Lane Gordon is Managing Partner at MerchantPortfolios.com, a company that specializes in marketing ISOs and portfolios for sale. Prior to MerchantPortfolios.com, Gordon spent a number of years working in the merchant processing industry. He can be reached at 866-448-1885 ext. 301 or firstname.lastname@example.org.
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