By Ken Musante
Eureka Payments LLC
Residual valuations are always a hot topic because the value of a given merchant defines how much effort ISOs can afford to put into a deal. In trying to better understand the valuations from a merchant level salesperson's (MLS's) perspective, I posted the following question on GS Online's MLS Forum:
"What is the going multiple on an MLS's residual? Have you had experience getting a loan on your residual, and was that a better decision than an outright sale? What are the reasons to sell your residual versus getting a loan against your residuals?"
CCGUY shared what many Forum respondents agreed with: selling a portfolio provides a cash infusion but may not be the best long-term decision. He wrote, "In the long run the way to go was to get a line of credit from the bank based on personal and business credit.
"[We] had one small portfolio we thought about selling once, too, and we service the merchants but we do not add to it. Selling would have been a nice influx of cash, but holding on to it has paid a lot more over the long haul."
CCGUY was able to get a bank loan, which generally have much lower interest rates but come with a cost. Banks require substantial documentation and, as CCGUY pointed out, the loan was based on personal credit, which typically means banks will require a personal guarantee, blurring the line between your private and business lives.
THECREDITCARDMAN reiterated CCGUY's point when he said, "I needed 50k to fund some projects and did not want to use personal monies. If I sold the rights to one of my portfolios, $4,200/mo @ 12x, I would have gotten the 50.4k. Instead, I asked for a loan against, @ 11 percent, 12 months payback = $52,800. Now the loan is almost paid, and I still have the income stream."
SLICK STREETMAN agreed. "Why would I sell what I have worked so hard to build?" he asked. "I do my darnedest to build long-term relationships by setting up each new account as if they were my own brother or sister. Lots and lots of TLC are poured over each and every one of my customers in hopes of having them for the long haul.
"On the other hand, if I had a portfolio that was heavily laden with leases, yes, I would gladly consider selling out before the chickens come home to roost."
WWW.PAYMENTLOGISTICS.COM better defined the question and pointed out some of the difficulty in selling residuals: "The problem with answering a question like this is that an agent is not technically selling their residual stream; they are selling their 'bundle of rights' (and often obligations), which includes the conditional right to receive residual payments.
"Furthermore, the financial condition and upstream risk of the ISO or provider paying those residuals can also have an impact on the value of the portfolio. Where does the residual payer stand in terms of industry hierarchy? ... Finally, purchasing an MLS's portfolio, or 'bundle of rights,' can be perilous because of how common and easy it is for the MLS to move merchants in violation of the purchase agreement."
WWW.PAYMENTLOGISTICS.COM is correct. Any buyer or lender against a portfolio must conduct due diligence, taking all the above - and more - into account. MLSs must also weigh the relative diversity of the merchants in question, their industry, portfolio size, attrition ratio, margin, processing platform and device, pricing methodology, seasonality, and merchant agreement. All of these factors must be considered, and each one has a distinct level of associated risk.
SALESAMS reiterated this very point and confirmed there are folks buying portfolios. "I think any MLS should start with their own ISO," he wrote. "I can confirm that AMS has purchased agent portfolios this year ranging from 10x to 20x (the average monthly residual)."
According to SALESAMS, AMS bases its valuations on portfolio size and performance, how many large accounts are in the portfolio, attrition guarantees on the portfolio, and what portfolio agreements exist concerning future business commitments.
Providing perspective from his personal dealings, CLEARENT said, "I have not sold but have bought portfolios, and from my research, multiples dropped about two years ago and really took a bath around the time of the Cynergy [bankruptcy]."
CLEARENT separately discussed the various motivations for a sale and the assets being sold. "It's a matter of your business plan," he wrote. "Let's say you have built a nice, steady residual stream, but want to retire. You don't want to support merchants anymore, and (forbid it) you have a form of minimum production to retain your residuals.
"If you can get a good value, you could sell the residuals, invest the return and treat it like a large IRA. Or maybe you want to sell a portion or one of your portfolios to expand your business. I have known some of the free equipment people who have sold groups of merchants to pay for the equipment, rather than raise added cash. Figuring the growth in business from the free equipment would offset the loss of longer-term revenue.
"The difficulty today is that the value is way down. Selling today would almost appear as a distress sale - even though I am seeing signs that buyers are coming back. Not running, but are coming back. So, to me, the choice to sell is as varied as one person is to the other. The key to any choice is timing, value, etc...."
To gain more viewpoints, I reached out to a couple of industry executives. First, I spoke with Harold Montgomery, Chief Executive Officer of Calpian Inc. and long-time investor in merchant residuals and portfolios. Harold believes portfolio valuations are difficult to ascertain because there have not been enough data points (portfolio sales) to develop trending.
Certainly valuations are lower than they were 2 to 5 years ago for a host of reasons, including the difficulty for buyers to obtain financing; The Credit Card Accountability, Responsibility and Disclosure Act of 2009 that, although it may not directly impact acquiring, may impact card usage and credit availability; and the economic environment, which is causing cardholders to keep a tighter grip on spending.
Calpian remains an active buyer, and Harold believes in the industry's future. However, for deals to make sense, the parties need to cooperate on a structure that protects all involved. Solutions include paying the purchase price over time and having the seller guarantee some level of portfolio performance by providing deals to offset attrition.
Other solutions exist, but the point is that "all cash" deals are much less prevalent and, if absolutely necessary, are being done at distressed valuations.
Another long-time industry professional, Darrin Ginsberg, CEO of Super G Funding LLC, also shared his perspective. Super G Funding offers MLSs the opportunity to either obtain loans against their portfolios or straight buyouts, depending on the needs and aspirations of the MLS. This provides MLSs the opportunity to compare both proposals.
Super G Funding evaluates various criteria when examining a portfolio, including the processor, the portfolio's diversity and its size. In general, loans are provided for up to 50 percent of the portfolio's monthly residual, multiplied by 10. The effective interest rate is between 17 and 19 percent. Adjustments are made for exceptional growth and other factors, and each residual advance is independently underwritten. More information is at www.supergfunding.com.
It was interesting to learn that when buying a portfolio, the larger the portfolio, the greater the multiple. Darrin stated that the approximate multiple paid is as follows:
Larger residuals command larger multiples because more buyers are interested in them, and the portfolios are generally more diversified and more professionally managed - and have less attrition.
I am actively involved in a new ISO, building portfolio residuals. I'm 44 years old and do not have immediate retirement plans. But some time in my life I will retire. When that day comes, I am comforted that although the residual multiple from a portfolio sale may be down from years past, I can always maintain my residual payouts and contracts and continue to get paid in accordance with my contracts.
In effect, the residual can be an annuity. Or, if the portfolio multiple is to my liking, I can choose to sell. Of course, both of these scenarios depend on my contract with my processor allowing for either, but that is a subject for another article. And with that in mind, I ask that you please continue to offer me your article suggestions. I need them.
When in doubt, sell something.
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