et's face it; most ISOs dream of a day when a bank or processor will buy out their portfolio for 32 times their monthly residuals and write them a single check for a few million dollars, after which they will ride off into the sunset in a golf cart.

However, the reality of a buyout is very different. Many ISOs reach a mature point in the growth of their portfolio and start negotiating a buyout only to realize that the processor or bank has offered a deal radically different from the deal they expected during the years leading up to the transaction.

As an ISO, don't let this happen to you. In this column I'll provide a few suggestions to help you avoid taking much less for your portfolio than deserved and hopefully place you closer to the golf cart scenario.

When negotiating the ISO buyout clause, consider the following:

Always Have an Exit

Like all business relationships, the ISO agreement should provide a fair exit strategy from the beginning, through the initial term and to the end.

Remember, there's more bargaining power before signing the deal than after.

It's hard to get FedEx to deliver life rafts to a sinking ship in high seas. Never sign an ISO deal unless you clearly know how to exit the ISO relationship at any point in time.

Set Objective Pricing

The million dollar question that every ISO contemplates at least once a week: How much will I get if I sell today? If the deal includes an option for either party to trigger a buyout of the ISO, then I recommend at least some wording to ensure an objective calculation of the price range.

For example, set minimum multiple pricing. Or, work with the processor to determine a comprehensive formula that would yield a price as a function of the number of merchants, dollar volume, revenue, attrition, type of merchants and liability.

Consider, however, that comprehensive formulas can backfire. You might build a pricing model based on where the ISO business is today, but six months from now the business might take a new direction that could make that formula harmful to the buyout pricing.

Determine Who Holds the Trigger

Sometimes only the processor has the right to propose a buyout; sometimes either party has this right. Sometimes the ISO can refuse; sometimes the ISO has to sell. Negotiate these business points to reflect each party's intentions at the time they draft the ISO agreement.

To the extent that you've crafted a good pricing formula, it's more acceptable to have a forced sale because you'll get fair pricing. To the extent that you do not know the pricing in advance, do not let the processor bind you to sell out on its request.

Avoid the "Last Month Grab"

At least one very prominent processor in the market today has a policy of paying the buyout price a month after the buyout and holding back residuals during the month before payment of the purchase price.

While I take no issue with this business decision, it appears that not all of this processor's ISOs are aware of the policy. I like to call this the "last month grab."

Let's say you agree to sell your portfolio on May 5, 2005. With this policy, you will receive residuals in respect of transactions up to and including April 2005, and the processor will pay you the purchase price (of some multiple of revenues) on June 5, 2005.

Let's say you agreed to 16 times the monthly residuals price. You think you will receive 16 times the revenue after a month with no revenue. However, the processor is effectively paying only 15 times the revenue because it holds back one month of residuals before paying the purchase price.

While this is a perfectly acceptable business deal to make, some ISOs would be very surprised to learn that they loose a month of residuals while waiting for their purchase price.

Make sure you know when the processor will pay the purchase price to avoid conflict during buyout negotiations.

Obtain a Release

When a processor or bank buys your portfolio, you let go of the upside of your portfolio, and you should be sure to get rid of the downside as well.

Upon closing of the buyout, have the processor provide a release from any liability on the portfolio. This is especially important in portfolios in which you carried the risk.

Set a Pay-out Schedule

If your portfolio is worth $1 million, and the processor pays only $100,000 on closing, something is fishy. The buyer probably lacks the intention to pay you the whole purchase price.

A buyout should mean that you are exiting the business relationship with the processor. I always recommend that processors pay ISOs at least half of the purchase price on closing with the other half to follow as soon as possible afterward.

Of course, attrition and volume might vary the balance of the purchase price, but you don't want the processor to pay out your purchase price over many years when businesses in this industry vanish in much shorter periods of time.

Watch Out for Post-closing Merchant Support

Before signing an ISO deal, know what the processor expects of you in terms of merchant support following the buyout.

Some ISOs expect to spend their time on the golf course while the processors expect them to support merchants until they pay the full purchase price.

If processors have post-closing merchant support expectations, then you are not completely out of the relationship. Some processors will ask for ongoing merchant support after the buyout.

I think requests like that are unreasonable. However, if they pop up in the deal, make sure that the processor compensates you for the services you provide.

Get the Right to "Top Up"

If your buyout includes a price that is paid out over time and is a function of attrition, why not write in a right to "top up" the portfolio to avoid attrition that would drive down your purchase price? Most reasonable processors will agree to this right; it's one that could save you a lot of money.

Be Aware of Buyout Varieties

Don't forget that different types of buyouts exist. The simplest and most common is the right of ISOs or agents to have their residual rights bought out. However, some buyouts also involve processors and their sponsoring banks assigning their rights in merchant agreements to third-party banks. Take some time to reflect on the different options when negotiating a buyout clause.

I hope all readers will experience their happy-ending portfolio buyout scenario. Remember to negotiate carefully and think before signing in order to make your dream a little bit more secure.

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, please contact Adam Atlas, Attorney at Law by e-mail at atlas@adamatlas.com or by phone at 514-842-0886.