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The Green Sheet Online Edition

July 22, 2019 • Issue 19:07:02

ISO succession planning

By Adam Atlas
Attorney at Law

Like all business owners, ISO owners need to plan for when they will no longer be able to run their businesses. The legal jargon for this is "succession planning," and it obviously involves more than just an individual's ISO business. The subject is a bit morbid, but it comprises a necessary part of a sound business and legal strategy. In this article, I will highlight key considerations that are relevant to all ISOs – large and small.

Get a will

ISO owners should hire local counsel in the state where they reside to draft a will that will cover all aspects of their property – including their shares in an ISO agreement. The purpose of a will is, of course, to make sure the property of the ISO owner goes to the intended recipient should the ISO owner pass away. One asset of an ISO owner is the ISO company shares. If the business has multiple owners, make sure your will works in conjunction with the ISO company's stockholders' agreement.

Get a power of attorney

The drafting of a will is often accompanied by a power of attorney in case the will-maker becomes incapacitated. There are a number of unfortunate outcomes that occur when an ISO owner is still alive but, for one reason or another, cannot do what is normally required to run the business. In those instances, a power of attorney can be used to delegate to a trusted person some or all of the rights and privileges of operating the ISO business.

The person chosen to assume the rights of an ISO owner should have enough knowledge of the ISO business to not only run it honestly, but also with the goal of ensuring that the business operates normally and with the amount of growth that would be typically expected.

Stockholders agreement provisions

When an ISO has multiple owners, a stockholders' or shareholders' agreement should be in place that will provide for buyouts or other share allocation provisions in the event that one of owners is incapacitated or has passed away.

In cases where the shares of an owner are to be transferred from the deceased owner to another owner, the stockholders' agreement will usually provide for assignment of an objective value to the shares – such as a percentage of the overall value of the company – that is set out in a formula.

ISOs are often evaluated as a function of the residuals received each month. An ISO owners' preferred method of valuation should be reflected in the stockholders' agreement provisions pertaining to the transfer of shares from one owner to another in the event of incapacity or death.

ISO agreement provisions

Agent agreements with individual agents (not companies) should provide for the counter party to the agent to continue to honor the terms of the agent agreement if the agent passes away and bequeaths assets to another person. Again, the chosen heir should be capable of operating the business. An inexperienced heir who inherits an agent agreement could easily undo all the work the decedent performed to build the merchant portfolio by, for example, failing to service accounts or soliciting accounts in violation of the terms of the agent agreement.

When the ISO is a company (not an individual), the fact of one shareholder being incapacitated does not, of itself, change the status of the ISO (as a corporate entity) that is a party to the ISO agreement. As a matter of law, a company is a separate legal person from the individual shareholders who own the company. Technically, if a stockholder is no longer around, the company of which the individual is a stockholder remains in existence and remains bound by the contracts to which it is a party – including an ISO agreement.

The ISO agreement, therefore, is not directly impacted by the absence of one stockholder of the ISO. However, ISOs are registered with payment networks (that is, Visa, Mastercard etc.) to solicit merchant services. Those registrations are dependent on the financial profile and creditworthiness of individuals who are owners of ISOs. Consequently, the fact of an ISO's stockholder status changing from one person to another could change the underwriting profile of the ISO, which could lead the ISO's sponsoring bank to be less willing to maintain the ISO's registration.

ISO stockholder heirs should be selected in advance, therefore, to be not only capable of running the ISO business, but also to have a financial profile that is sufficiently strong to avoid the ISO losing its registration over the change of ISO ownership.

Succession planning: planning for growth

Succession planning is only one facet of an ISO's plan for growth. For example, an ISO of a certain size should distribute knowledge among various members of the team, so that if one team member is not available, others can fill in and keep the business going.

In larger financial institutions this kind of plan is called a redundancy plan, and it is part of ordinary business operations planning. Investors, processors and even merchant clients of an ISO of a certain size will expect the ISO to have a sufficiently robust business plan to weather the temporary or permanent loss of one or more people.

All succession planning should be supported by qualified local counsel who will be familiar with local state succession laws, as well as tax planning associated with a succession plan. Most succession plans are a set-and-forget piece of work, but they should still be revisited from time to time, as the appointed replacement might become more or less suitable over time to replace the ISO owner in question.

One more thing: as a community service, my firm provides free advice to ISO widows and widowers to help them make the most of the businesses they inherit. end of article

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law by email at atlas@adamatlas.com or phone at 514-842-0886.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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