The Green Sheet Online Edition
July 28, 2008 • Issue 08:07:02
How sellers blow deals
It's a bit counterintuitive, but from a professional intermediary's perspective, one of the most common and greatest of hazards to the successful selling of a portfolio, or an ISO for that matter, are the sellers themselves.
A notice stating, "Danger, live military exercises under way" should be prominently displayed as a warning to all would-be buyers. And, trust me, that analogy is appropriate. I've seen more deals "blow up" on account of the seller's approach and demeanor than I care to recall.
What follows are five danger areas to watch out for in the buying-selling process.
1. Recognizing "bubble-itis"
Yes, we're all human, and we all tend to get lost in our day-to-day activities to the point where we believe that our world, or our perception of the world, is always the correct one. That's called living in the proverbial bubble.
Let me recommend strongly to all sellers, check your bubble status before going to market with any opportunity.
The marketplace is dynamic. Today it's a buyer's market; tomorrow it may be a seller's market. Today the hot portfolio commanding a premium price comprises merchants within a single vertical; yesterday it contained merchants with as many different Standard Industrial Classification codes as there are jelly beans in my grandmother's candy bowl.
I think you get the point. Understanding the marketplace is priority one before entering the battlefield.
2. Rushing the sale
When buyers feel sellers are in a rush, they interpret it in many different ways, and all of them are bad.
Sellers may have legitimate reasons for seeking a quick sale, including personal financial needs, commitments to expand their businesses, washing losses against gains they may receive from sales and many others.
Though legitimate, the only things buyers see when sellers are rushing to do deals are giant red flags: There's a problem with the portfolio; the seller's hiding something; the seller's got money problems and so forth.
A word to the wise: Sellers can instantly add value to their sales by taking their time, even if they have to pay fees for securing a credit line to buy themselves time. In many cases, fees and interest are offset with the increased price sellers are able to achieve by taking a more leisurely approach to the sale.
3. Saving "spooky" for Halloween
When you are selling your ISO, portfolio or residuals, most likely the terms of your deal are going to include some sort of earn-out or performance provision laid out over time. What sellers fail to realize is that inherent in any deal with an earn-out is a long-term relationship.
Buyers and sellers will need to get along together in order to communicate about performance, reloading of accounts and earn-out calculations for the next 12 to 36 months. Sellers all too often forget about this; but, believe me, buyers don't.
Time and time again, sellers blow their own deals by spooking buyers. How do they do this? Sellers spook buyers by giving them a sense that they, the sellers, are impatient and therefore going to be unmanageable, or that they are prone to emotional volatility if they consistently display a tendency to overreact within the normal framework of contractual negotiations. These qualities surely spook seasoned and not-so-seasoned buyers alike.
I've seen cases where buyers stop negotiating and reject deals altogether because of what they see as potentially unmanageable sellers going forward. Sellers' impatience or tendency to overreact while negotiating deals injects uncertainty into prospective buyers' minds about the practicality of having cooperative and harmonious relationships post-transaction.
Do not be mistaken, uncertainty equals risk, and adding more risk to deals will never do you any favors.
4. Having patience with moving parts
Despite having reached an accord in the form of a term sheet, the process of executing an asset purchase agreement is lengthy. It involves much give and take between buyers, sellers and their attorneys. There are a minimum of four people involved in the drafting, creating and finalization of any single asset purchase agreement: the buyer, the seller and each of their attorneys.
In most cases, the buyer and seller have business partners, accountants, chief financial officers and, in some cases, board members involved in the process of fine-tuning the final purchase agreement. When you do the math, between the buyer and the seller there may be 10, 15 or more people involved, either directly or behind the scenes, in the drafting of the final purchase agreement. That's a lot of moving parts.
Just by the nature of the number of individuals involved. The process can take time, particularly if it involves an ISO or enterprise-level acquisition. These agreements go back and forth multiple times between the attorneys involved, with numerous fine-tunings of agreements.
So, regardless of the buyer's intent to complete the acquisition by a certain date, this date may keep moving further out in time so long as the final version of the asset purchase agreement has not been mutually agreed upon.
The point is that a seller's understanding of the deal process will go a long way toward setting appropriate expectations for material dates and times, alleviating seller's impatience with the deal and any negative repercussions the buyer may experience from an uptight seller.
5. Steering a ship with two captains
Not all, but most, transactions involve a third-party funding source that is financing the acquisition, and until that funding source signs off on the deal, quite frankly, there is no deal.
Sellers tend to think that once the asset purchase agreement has been executed, that it's a "done deal" - wrong. Sellers also tend to think that once the asset purchase agreement has been executed, the closing date has been finalized - wrong again.
Depending on who is financing the acquisition, in most cases the execution of the asset purchase agreement by the buyer and seller is just the beginning of the process. Depending on the size of the deal, the funding source may require a third-party evaluation of the ISO and/or portfolio to substantiate the value of the transaction.
Additionally, these financing sources may have their own input about the asset purchase agreement and may want amendments or other additional changes in the purchase agreement documents.
My advice, obviously, is always to understand how the buyer is financing the deal, and if there is, in fact, a third party (Captain Number Two as it were), which makes it imperative that you understand the deal will require a second sign off before it moves to closing.
The moral of the story is that sellers need to exercise tremendous patience, self-discipline, awareness and understanding before going to market with a portfolio or ISO. If you think you may be lacking in any one of these areas, it is in your best interest to seek the help of qualified third parties who can guide you to success.
So read the signs and recognize the danger signals; it might just help you from stepping on a land mine and having a deal blow up in your face.
Lane Gordon is Managing Partner at MerchantPortfolios.com, a company specializing in marketing ISOs and portfolios for sale. Prior to MerchantPortfolios.com, he spent a number of years working in the payments industry. Gordon holds degrees from the Massachusetts Institute of Technology and Carnegie Mellon University. He can be reached at 866-448-1885, ext. 301; firstname.lastname@example.org; or by fax at 508-638-6444.
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