The Green Sheet Online Edition
March 28, 2011 • Issue 11:03:02
Finding opportunity in an altered business environment
Editor's Note: This is Ken Musante's final article as author of Street Smarts. He has expertly engaged GS Online's MLS Forum and distilled the wisdom shared therein without fail over the past year. The Green Sheet is pleased Ken will continue as one of our esteemed contributing writers. Starting with our April 11, 2011, issue, Bill Pirtle will take on the Street Smarts mantle. As the author of Navigating Through the Risks of Credit Card Processing, Bill shares our utmost dedication to the education and success of payment professionals. Please join us in thanking Ken for his service and welcoming Bill to the Street Smarts fold.
First, I want to thank The Green Sheet for encouraging me to accept the Street Smarts assignment. The folks there knew I could develop, with the help of the GS Online MLS Forum community, sufficient topics to keep the articles interesting.
I also very much appreciate fellow community members. I hope that regardless of whether you agreed with me, you believed I represented all viewpoints and correctly captured the ideas in the quotes posted.
The Green Sheet was generous enough to do an Industry Leader story on me for publication in issue 05:08:02 on Aug. 22, 2005. Since this is my last Street Smarts article, I want to update you on how my career has subsequently unfolded.
A startling takeover
Our country and industry have been through tumult since 2008. My situation has changed radically since then and inspired many of the topics in this column. As you may recall, the parent company of my employer, Humboldt Merchant Services (owned by the First National Bank of Nevada), was shuttered by the Federal Deposit Insurance Corp. in July 2008.
Because Humboldt was a stand-alone company and not purchased by the successor bank, we were owned by and worked for the FDIC for more than three months. This was extremely difficult and humbling. It was early in the financial crisis, and although over 300 bank failures have occurred since then, we felt like we were the only ones suffering this consequence.
Many decisions were dictated to us by FDIC policy while we provided due diligence material to potential buyers. The other managers and I instructed and calmed staff, attended to myriad questions from buyers, and navigated the FDIC's rules and management style.
I was elated and gratified when Humboldt was purchased by Moneris Solutions Inc. in November. Moneris purchased nearly the entire organization, which provided jobs for all staff members and continued support for all sales contractors.
Over the next 18 months, I worked to maintain sales levels, drive new business and integrate Humboldt Merchant Services into Moneris. I came to understand and appreciate how a successful larger organization makes decisions and competes within our industry. Moneris was fair to all former Humboldt employees, and I have maintained friendships with a number of the people I met at that time.
I also learned, however, that my skills are better suited for a smaller organization. Consequently, I left Moneris in March 2010 to join a startup organization.
A new venture
Scott Bartlett and Steve Kimberling had started an ISO, Eureka Payments LLC, early in 2010. With an alteration of the business plan, I decided to take the leap and join a cash-starved startup. The three of us were the entire company. It was a liberating, yet trying experience.
Though I founded Humboldt Merchant Services in 1993, it was a part of a larger organization, Humboldt Bank. We had the parent company's support for facilities, procurement, budgeting and, more importantly, funding.
With Eureka, the three of us were responsible for every aspect of the business. The first step was reworking the business plan so it would attract investors to provide us funding for our operational and marketing expenses until our residuals could sustain us.
We developed strategic marketing plans to pursue three niches:
- Mobile merchants
- Hard-to-place card-not-present merchants
- Merchants situated in and around Humboldt County, Calif.
Next we undertook the legal work to develop our employee, operating and subscription agreements.
The employment agreement provides for each of us to earn a specific salary for a set period in return for x percent ownership in the company. We structured the contract to protect each of us from being ousted inappropriately, while simultaneously protecting the company by making our ownership contingent upon active participation at a certain performance level for a specified time.
The operating agreement details the relationships and rights of both outside investors and managing owners. This is a most complex document. It sets forth tax treatment of both losses and earnings, outlines the duties of the managing owners and restricts actions that could harm outside investors. Changes in corporate structure require a super-majority to protect all parties.
Finally, the subscription agreement is signed by the outside investors in exchange for shares in the company. In addition to explaining what they obtain for their investment, it also, in detail, explains risk factors we know of or hypothecate. The document accompanied our financial forecast, which we assembled along with our business plan.
Because of our advance preparation, obtaining the needed investment was surprisingly easy. We had targets and only approached individuals who would not consider the investment to be significant. We also wanted fewer than five individuals so we would be able to meet with our investors easily.
Finally, we wanted individuals who could assist our business by helping with our strategy or by providing us leads. Fortunately, two long-time associates came through and have been the perfect outside investors. They understand the industry yet do not care to manage our business; they trust us with their investment.
While obtaining investors, we also launched our marketing efforts. To do this, I had to learn the business from an entirely different perspective. While I had sold to merchants directly earlier in my career, it had been over a decade since I had programmed terminals.
Completing an application, selling services, preparing comparative analyses and conducting sales calls were easy. Learning to program terminals and demonstrate gateways was more difficult.
Relearning the various terminal functions and then installing them was, at times, intimidating. But the more often I did it, the easier it became. My partners and I divided other duties such as information technology, procurement, product evaluation, finance, contract review and administration.
One obstacle we encountered was finding the right processing partners. Because of our market niches, we needed processing partners who were willing to accept accounts that do not meet traditional acceptance criteria, but who would also afford us the security of a sound processing bank and a fair contract.
We reviewed dozens of contracts and became an ISO for two well-capitalized banks. Doing so allows us to market and build our own brand. Given the spate of shuttered banks, we sought financial stability over higher residual payouts.
My business partners and I have complementary skills and have divided our responsibilities to maximize our efforts. I pursue leads from industry professionals who need assistance placing their business.
I am thankful I have been able to leverage my contacts and experience to develop a niche to help fuel this company. Since our company's founding, our country has lost 7.5 million jobs. We are thankful to have moved offices to accommodate an additional staff member. A fifth joined us in March; a sixth will come aboard in April.
I remain encouraged by our industry but am fearful of the Durbin Amendment's impact. Should it be implemented as proposed, despite what may be a very short-term lift in earnings, this will be terrible for our industry. Issuing banks will discourage card usage, and margins for check card transactions will fall below what we are seeing on PIN debit.
Although we will lose the competition from industry innovators, on the debit side, we will see a corresponding and radical decrease in our margins. Banks will push volume to credit products and discourage debit usage. We shall see how this plays out, but this could radically alter our future strategy and growth.
My time interacting on the MLS Forum has been invaluable. Although I was successful in past jobs, I would have been even more so with the information I now possess. I look forward to being a participant in the forum and to reading Street Smarts articles written by Bill Pirtle. Bill is an industry author and resident expert. I have come to know him through the forum and know he will do a great job of carrying forward the Street Smarts tradition.
I'll close my last article with the now-familiar slogan that arose when I joined Eureka Payments. We all had too many things to do and difficulty prioritizing. It remains as apt now as it was then: when in doubt, sell something.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at firstname.lastname@example.org. For more information, visit www.eurekapayments.com.
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