By Adam Atlas
Attorney at Law
Sooner or later, ISOs and merchant level salespeople (MLSs) sell their portfolios or businesses. Long before a sale ever becomes an option, it's useful for payment professionals who are developing merchant portfolios to think about the factors an objective purchaser might take into consideration when preparing an offer to purchase a portfolio.
The purpose of this article is to list a number of criteria that are often used at least as part of the basis for portfolio valuation.
While the criteria I've identified tend to apply for sales at almost any level of our industry, let's assume I am discussing the sale of a portfolio of merchants solicited by a registered ISO that has a direct relationship with a large processor, such as First Data Corp., Global Payments Inc., Chase Paymentech Solutions LLC, TransFirst LLC or First American Payment Systems LP, among many others.
The following list is not necessarily in the order of importance and will not necessarily include all the criteria that might apply to your individual situation.
But in the heat of a purchase negotiation, many issues arise, such as whether annual fees are in or out and whether Payment Card Industry Data Security Standard compliance or IRS reporting fees count.
Then, there are ancillary residuals, such as those for equipment, gift cards and gateways. Also, the ISO has to decide whether it wishes to be paid on the gross amount of residuals that it receives or some lesser amount, such as the gross amount less payouts to agents.
It's safe to say that once the parties agree on an objective method of calculation, the dollar value of monthly residuals will be the greatest single indicator of the purchase price of a merchant portfolio.
Naturally, a buyer will prefer that attrition be low. However, some businesses tolerate a high level of attrition.
For example, if you are an ISO selling in-person to brick-and-mortar merchants and you provide face-to-face service, chances are you will have a lower attrition rate than if your ISO consists of a call center responding to Google Inc. AdWords placements and relying on minimum monthly fees for a large part of your residuals.
Those are two examples to illustrate extremes or, more importantly, illustrate the fact that there is no single attrition rate that fits all ISOs.
The precise amount, duration and nature of such a guarantee will have an impact on the purchase price. This is an important extension of calculating the attrition rate in the first place.
Some ISOs have no express right to sell any of their rights (not even residual rights), while other ISOs have the right to cause the acquiring bank to assign its right and obligations under merchant agreements to another bank.
Where you lie on this spectrum will be dictated by your agreement and will also have an impact on the value of your business.
Think of the difference between selling a new car with wheels and one without them, and you will quickly appreciate the value of having the right to portability spelled out in an ISO agreement.
Let me be clear, whatever portability rights are granted exist because there has been some measure of negotiation and some consideration given by the ISO to the acquirer for the rights it has.
Also, some SICs are more attractive than others. For example, on the same volume and revenue, a restaurant is more attractive than a merchant, such as a furniture store, that accepts orders for future delivery, because the right of bankruptcy and heavy chargebacks are very real for the latter type of merchant.
First, this is an indirect way of obtaining an additional measure of guarantee on the seller's nonsolicitation agreement (that is, it polices promises made by seller to not re-solicit the business of merchants just sold as part of the portfolio). Second, why buy just an egg when you can get the whole goose?
This list is not comprehensive. Each transaction has unique characteristics that will lead the parties to a deal that is acceptable to both.
As a general rule, if the purchaser explains, on a rational basis, the method by which he or she proposes to evaluate the portfolio, that will relieve a lot of anxiety on the part of the seller, who might otherwise be faced with an abstract price and no discernible basis for understanding how it was calculated or how to proceed with negotiations.
All ISOs and MLSs could benefit by reflecting on how their day-to-day practices contribute to the ultimate value of their businesses. Payment professionals are in this for a profit, after all.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at email@example.com or call him at 514-842-0886.
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