By Lane Gordon
MerchantPortfolios.com
You can say what you want about the economy. We can all speculate as to the effects it will have on consumer spending and merchant processing accounts, but one thing is for sure: The number of active buyers of merchant portfolios and residuals is rising again.
A significant number of buyers are in the marketplace because they feel they can finally obtain value. And some have entered the scene because funding sources that were on the sidelines for the past few months have now given the green light for funding future acquisitions, subject to tightened underwriting standards.
The availability of portfolios and residuals for sale has also increased significantly. We've seen the shifts: Twelve to 24 months ago not much inventory was for sale, and it was a sellers' market. More recently, there appeared to be more available deals than potential buyers in the market.
Supply and demand now appear to be closer to equilibrium, as there appear to be significant numbers of both buyers and sellers in the market.
Despite the renewed plethora of prospective buyers, it remains to be seen whether many of them have real and confirmed funding behind them. Cash is always king, especially on small deals. But when you are selling a large deal, you better be sure the buyer has a close and active relationship with a financing source.
When you ask buyers if they're sure they have the funding, you cannot afford to accept at face value answers along the lines of, "Do you know who we are?" or "We're all set with financing." In this marketplace, that won't cut it. Frankly, I would advise you to not waste time with prospective buyers until they've either substantiated funds or they've directly introduced you to their funding sources.
There are potential buyers who may have good intentions and may believe they're "all set" to purchase portfolios, but quite a few haven't checked in with their funding sources lately.
Many will receive an unpleasant surprise when they do so because they will learn some institutions that were funding portfolio acquisitions several months ago have tightened up their underwriting standards or have decided to wait six months until they determine the direction of the market. And when you hear that, it means an institution has decided to stop funding deals in our space for the time being.
We've seen several transactions recently in which the deal terms have changed significantly at the request of the buyer's financing source - at the 11th hour (the time of transaction funding). We've also seen many financing sources tighten up their terms, as well as their "tests" for underwriting qualifications.
Buyers should sync with their funding source to anticipate new documentation and data requests required of them and the seller. Buyers who don't stay on top of things risk their reputation in effectuating future transactions if a funding source pulls the plug on a deal at the last moment for reasons the seller feels should have been anticipated by the buyer.
In an industry where everyone knows everyone, this puts a buyer in a precarious situation. Again, the best way to avoid this is to get intimately close to your funding source and stay on top of the latest changes so you can anticipate surprises before the deal goes too far down the road.
Acquisitions in the merchant processing industry are happening, and they are getting funded - despite the doom and gloom on Wall Street and in the economy in general. However, buyers and sellers need to prepare themselves for a much more thorough financial review.
Funding institutions are now doing much more comprehensive tests for portfolio attrition analyses, and they are requiring additional guarantees from buyers. Institutions that are lending on portfolio purchases are also encouraging buyers to stretch out the terms of the acquisition.
The total price (figured in a multiple of the portfolio's residuals) offered on a strong portfolio most likely will consist of a certain portion upfront at closing, with subsequent payments coming after 12 and 24 months, contingent (of course) on achieving specific attrition requirements.
Interestingly, buyers have pushed these back-end payments (also called holdbacks or earn-outs) out in time from 12 to 24 and, sometimes, as much as 36 months. Sellers should be aware that both buyers and financing sources want sellers to achieve these earn-outs now more than ever, because it means the purchased asset is performing according to initial projections that guided the underwriting.
Not only do buyers and their funding sources want sellers to receive scheduled back-end payments, but many are also making provisions for sellers to offset attrition.
Buyers are either allowing sellers to load additional accounts into the sold portfolio to mitigate attrition or to write future business for the buyer, which is applied or credited against the attrition losses of the portfolio or residual.
Funding sources want portfolio acquisitions to succeed for buyers. Consequently, they are pushing buyers to allow for provisions for the seller to help in ongoing maintenance and support of purchased portfolios. If anything, there seems to be a much more cooperative post-transaction feeling between buyers and sellers for obvious reasons. A word to the wise: If you are selling a residual or portfolio and you can't get along with the potential buyer, think twice about selling to that particular party.
Short of selling a small residual for all cash upfront, buyers and sellers must be able to get along, work together and communicate two to three years to receive the full benefits of the transaction. So you better like the group that you are selling to.
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; lane@merchantportfolios.com; or by fax at 508-638-6444.
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