By Adam Atlas
Attorney at Law
As ISOs and merchant level salespeople (MLSs), one of the most useful legal tools in your office is - your calendar. Apart from helping you keep appointments with merchants and remember important family events, the ISO calendar is an important tool for recording vital dates in your merchant-account sales relationships.
The purpose of this column is to highlight eight vital dates and clauses you should track:
1. Effective date of agreement
The effective date of your agreement, or the start date, is not necessarily the date the agreement was signed or the date written in at the beginning of the agreement.
Some ISO agreements set the effective date at an interval of time after you have referred your first merchant. It's important to know the effective date of your agreement because all other vital dates - and likely the anniversaries of the agreement - will flow from that date.
You also want to track the effective date so that a few years from now, you can determine how long you have actually been doing business with the company for which you are selling.
Most legal jurisdictions do not permit perpetual contracts. Consequently, every contract must have a fixed and definite term. Many jurisdictions also forbid contracts from having a term that exceeds 100 years.
However, parties are allowed to provide for renewal terms, which is why most agreements have an initial term followed by automatic renewal terms. The initial term, together with renewal terms, generally constitute the whole term of the agreement.
3. Initial term of agreement
The initial terms of agreements in our industry vary widely: from one year all the way up to seven years. The initial term is the stretch of time during the agreement before it is first renewed.
Some ISOs and MLSs want short initial terms so they can exit the relationship if it is not a good one. Other ISOs and MLSs want a long initial term so they can lock in favorable pricing or other terms.
Processors generally want a long initial term because it allows them to book the business of the ISO or MLS for as long a time as possible without the burden and risk of renegotiation.
4. Renewal date
The renewal date is the first date of the term that follows the initial term. This is an important date because it signifies the beginning of a renewal term, which may be different in length from the initial term.
Keep in close contact with your processor to make sure you are aware of any proposed changes set to take effect on the renewal date. If those changes are not ones you want, you must consider putting an end to the relationship.
5. Renewal term
Renewal terms are the successive terms of an agreement that usually follow the initial term. Renewal terms are usually one year and are occasionally two years in length.
Again, ISOs and MLSs may prefer a shorter renewal term because it will facilitate a quicker exit if the relationship sours. Usually, the lion's share of an agreement's overall duration falls under renewal terms.
As an ISO or MLS, be sure to track where you are in your agreement's renewal timeline.
6. Deadline for notice of nonrenewal
When an ISO or MLS approaches the end of an agreement's initial or renewal term, there is often (but not always) an opportunity to send notice to the processor of the ISO's or MLS's intent to not renew the agreement. This means the ISO will terminate the agreement at the end of the current term.
Make a careful note of the deadline for this notice; it's often between 30 and 180 days prior to the end of the current initial term or renewal term. If you miss this deadline, you could be bound to an agreement for one or two additional years, or more, even if you do not want to be.
7. Post-termination rights
Before you terminate any agreement (and before you sign one, as well), you should consider what your rights and obligations will be following any termination. In a nutshell, ISOs and MLSs should be especially cognizant of whether their residual compensation on merchants will continue after they choose to terminate their agreements.
If residuals terminate because ISOs or MLSs simply choose to not renew, without being in default, then they have a serious problem of being tethered to the processor so long as they wish to be compensated.
There may also be post-termination obligations for the parties to the agreement. The ISO or MLS may be expected to carry on certain support obligations for merchants in order to continue receiving compensation.
Post-termination rights and obligations are, perhaps, the most important set of rights and obligations ISOs and MLSs have because they determine the long-term value of the portfolio they have helped build.
8. Right of first refusal
If you have the right to sell your residual stream or merchant accounts to a third party, then, chances are, the processor will have a right of first refusal, which will be reserved for the processor to exercise for a set period of time - usually between 15 and 45 days.
That period will be critical for the selling entity to monitor, as it involves the ISO or MLS, the processor and the potential buyer who is waiting to purchase the residuals or merchant accounts.
Of course, the specific vital dates of your agreement will be unique to your agreement and can be found only by reading the agreement you have signed.
The notes in this column are of a general nature only and do not necessarily apply to your agreement; instead, they reflect what is customary in the merchant acquiring industry as I have come to know it.
With electronic calendars, keeping track of these dates should be a snap.
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, e-mail Adam Atlas, Attorney at Law, at firstname.lastname@example.org or call him at 514-842-0886.
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