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Exit Strategy: Cashing In on Your Hard Work

By Adam Atlas

If you leave an ISO alone in a room with a calculator, you will be amazed by the number he generates. The merchant account sales business is not worth getting into if you have not put some thought into how you plan to get out of it.

Whether you are one merchant level salesperson or a major ISO with 100 employees, you probably leave the office every day thinking a little about what dollar figure you could get if you sold out at that moment. If not, you should be. Following are a few things to keep in mind when planning your exit strategy:

Have an Exit Strategy

Many ISO and agent agreements fail to include a section on buyout provisions, or other exit strategies. Don't sign any contract that does not include some kind of discussion on how the agent or ISO can end the deal.

Negotiate Early

Close on your exit terms before you sign the ISO agreement, while you still have negotiating power. If you are low on cash and your deal is nearing its end, processors and banks often exploit that situation to pay low multiples.

Use an Objective Formula

Don't agree to a buyout price that is "the market rate" or "a function of business conditions." Rather, agree to buyout provisions that allow you to calculate the exact dollar amount you will receive at any time you decide to sell.

The objective and easily definable and verifiable criteria for the formula include: monthly residual payment, monthly dollar processing volume and attrition rates. With these kinds of objectively verifiable criteria, you can easily create a formula that is easy to use, predictable and fair for both parties. Never depend on language such as "fair market value." That kind of language is an invitation for a dispute because few people can, for a reasonable price, provide an objective, fair market evaluation of a portfolio.

Get Cash Upfront

Don't agree to a buyout clause with much less than 50% of the full purchase price paid on the closing date. It is normal and acceptable to have purchase price payouts over a period of six to 12 months, but those long-term payouts, which allow for adjustments on attrition, should not be for much more than half the entire purchase price.

Prevent the "Last Month Grab"

Be wary of what I call the "last month grab." This is where the purchasing processor pays you your buyout multiple only one month after you stop receiving residuals. By doing so, the buyer collects your residuals for the last month and then uses these residuals as part of your payment to you. It's patently unfair, but nonetheless not uncommon for some large national ISOs.

Determine Who Holds the Trigger

You always want the right to decide on a buyout and the right to refuse it. You will not always get these rights, but try to get them. Read a buyout clause carefully to discern who has the right to trigger the event and when. Most buyout clauses are available to use only after the end of an initial term of the agreement, which is typically between two and five years from the start.

Learn the Exit Types

When a buyout clause is triggered, there are a variety of consequences. Following are the three principal results of a buyout:

  1. You relinquish your rights in residual payments and assign your agent or ISO deal to another entity in consideration for a lump sum payment that is a multiple of your monthly residual amount.

  2. A new bank has the right to be the assignee of the rights under the merchant agreements that you have helped establish and is willing to pay you a buyout price in consideration of that right.

  3. You relinquish your rights in residual payments by accepting a lump sum payment from the processor or bank that is paying you your residual amounts. Depending on your bargaining position opposite the processor or bank, your ability to secure these rights will vary greatly.

Consider Post-Termination Rights

Perhaps more so than in any other industry, the merchant account business has a clear notion of post-termination rights.

In other words, if you have not been bought out, not committed a very major default under your ISO agreement, and simply no longer want to send in new deals, you could (if your deal permits it), terminate the agreement with the full expectation that residual payments will continue to be made to you "for a lifetime."

If we lived only as long as the lifetime deals in our industry, we would all live short lives. Give careful consideration to the interaction between your post-termination residual rights and the buyout clause.

You want your buyout rights to survive any termination. You even want greater buyout rights following termination because you will be more distanced from the processor or bank at that point.

Be Aware of Multiples

Everyone wants to know what the going multiple is in the market. I have seen deals in the last year that range from 15 to 32 times monthly revenue. The multiple paid really is a function of various kinds of factors such as attrition, kinds of merchants and dollar volume of the merchants.

When dealing with multiples, make a clear deal on a number below which you will never sell. For example, create an objective formula to determine the price as a function of monthly revenue and attrition, but include an indication that the price will never be less than "X" times the monthly residual.

Remember that some multiple formulas exclude big processing months such as November and December. This is a little unfair, but these kinds of nuances are all part of the negotiation of a buyout clause.

Include the Right to Replace

If your buyout has a post-closing payout of part of the purchase price, as most of these deals do, then always include your right to replace merchants that go missing with new merchants to avoid falling below attrition benchmarks that could seriously erode your purchase price.

It's very hard for new ISOs to imagine the end of their business cycle, but strangely, the end is one of the most important moments to think about right before the beginning. Try to avoid unnecessary misunderstandings, or worse, raw deals.

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 or call him at 514-842-0886.

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