By Adam Atlas
Attorney at Law
In his classic song, Paul Simon says, "There must be 50 days to leave your lover." There aren't quite 50 ways to sell your ISO, but this article describes all the ways I have run across over the years.
Every sale transaction has its own logic and usually makes sense for those carrying it out. But it's important to consider the implications of how an ISO is sold, as it will have an impact on sale price, tax, post-closing liabilities and many more variables.
This form of sale consists of the shareholder of the ISO corporate entity selling their shares or member interests in the corporate entity that is party to the ISO agreement. This amounts to a change of control of the ISO but not an assignment of the ISO agreements to which the ISO is a party.
For the seller, this is a convenient way to exit the business entirely and allow someone else to take the whole of the operating business together with its assets (for example, ISO agreements) and liabilities (for example, agent agreements, referral agreements and loans).
For the buyer, purchasing the shares of an existing company carries significant risk because the company may have liabilities to third parties that are not disclosed at the time of sale. For instance, if the seller is dishonest and had their company guarantee a loan on their home or boat some years in the past.
The buyer might be ignorant of the guarantee and in for a rude surprise when the creditor on that loan calls on the guarantee. This is the main reason ISOs are rarely sold in the form of a share sale transaction.
If you are contemplating a share sale transaction, review the ISO agreements of the company being sold. Most ISO agreements do not prohibit or require a consent for a change of control—that is, a share sale—but some do. A review of all of the ISO's commercial agreements would be necessary to check for change of control consents.
Also, even if the ISO agreement doesn't expressly require consent for a change of control, the company being sold may have a Visa or Mastercard registration as an ISO through a sponsoring bank. The sponsoring bank may wish to underwrite the new shareholder to maintain the registration.
The most common way to sell an ISO is to sell its assets. With respect to ISO agreements, this would mean an assignment of the agreement from the selling entity to the buying entity, a process that usually requires consent of the processor. Agent agreements and referral agreements of the ISO are also often assigned to the buyer.
Buyers love buying assets because it allows them to cherry-pick. A buyer might like one ISO agreement for the seller but not another; they might like some agents but not all the agents. The purchase of assets also allows the buyer to mostly avoid risks associated with buying a company—such as undisclosed liabilities.
Sellers may prefer an asset transaction because they might want to keep some ISO agreements or some agents and carry on the business apart from the assets sold.
Some buyers want just a single ISO agreement. Any number of reasons can lead to this preference, such as pricing or filling in a piece of the buyer's platform pallet. This kind of transaction is a simplified asset purchase involving just one asset: the rights (and obligations) of the selling ISO under the ISO agreement.
Virtually all ISO agreements would require consent of the processor to assign the ISO agreement from seller to buyer. Many of those clauses require that such consent should not be unreasonably withheld. Some (even large) processors take enormous liberty with the withholding of consent, sometimes taking eons to provide it and sometimes imposing unjustified fees—meaning fees that do not form part of the agreement signed by the seller.
In this kind of transaction buyers have to consider whether they can fulfill the obligations under the ISO agreement being purchased. There may be minimums or other commitments the buyer would inherit. Both buyer and seller must plan for residuals under the ISO agreement that were historically shared with agents. Will those agents be bought out? If not, who will pay the agents going-forward? Buyer and seller must plan for these and related issues before inking their deal. The buyer also needs to plan for registration of the buyer as the sponsored entity under the ISO agreement, which may take time and cost money.
Some buyers only want the upside. When an ISO sells only a residual stream, whether they like it or not, both parties are entering into a long-term marriage with complications. The buyer pays a certain sum for a future stream of residuals under a specific ISO agreement.
If the seller, however, defaults under that ISO agreement, that residual stream will be in jeopardy—so the parties need to address that risk. Similarly, the buyer might do something that offends the processor paying residuals, which may harm the residual stream purchased.
The most vexing issue with selling a residual stream is figuring out the portfolio of merchants to which it relates. Some buyers are not willing to lock their purchase onto a known set of merchants on closing. Those buyers sometimes like to cherry-pick merchants two or three years later, which is complicated considering many merchants will be gone by then.
In addition, buyers sometimes want sellers to back-fill the portfolio years later with newer merchants. And if that's not complicated enough, the parties must sort out who will pay agents that may be receiving part of the residuals purchased. Processor consent is also an issue.
Deals do not always fall neatly into the categories I've described, but hopefully, the general models discussed will serve as inspiration for you to decide which type of deal is best for you.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law by email at firstname.lastname@example.org by phone at 514-842-0886.
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