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The narrowing delta Because enterprise valuations were based on a company's
between ISO and entire cost structure, which included all the general and
merchant portfolio administrative costs in addition to the sales channel
valuations expenses, the valuations often came in lower than the
merchant portfolio itself. (The principle in play being that
By Adam T. Hark netting down a business' cash flows by all of its operational
Preston Todd Advisors and MerchantPortfolios.com expenses further reduces its future cash flows and pushes
the valuation downward.)
O ver the years, an interesting phenomenon
related to payment processing portfolio valu- The new ISO model
ations has arisen: the fair market value of a
merchant portfolio has, more often than not, The basic ISO business model has changed. ISOs are no
been equal to or greater than the fair market value of the longer just in the payment processing business. They're
payment processing company, or enterprise, itself. My in the technology business. ISOs provide value-added
proprietary database revealed that across a spectrum of products and services that go well beyond payment
ISOs with roughly 2,500 to 15,000 merchant identifica- processing. Integrated POS, end-to-end business
tion numbers, approximately eight out of 10 portfo- management solutions, and new infrastructure schemes
lios displayed this characteristic from 2008 through 2015. are part and parcel of today's ISO business model and the
merchant portfolios included therein.
The notion that a merchant portfolio asset can be worth
more than the entirety of the company that built it is The sale, implementation and servicing of these new
counterintuitive. After all, it's human nature to intuit technologies doesn't come without a price. Whether
that a part of something cannot have a greater value than an ISO elects to build, develop or acquire these new
the whole. But when you take a closer look at the cost technologies, or leverage someone else's technology in
structure of a traditional ISO, the explanation for why this some form of joint venture or strategic relationship, the
has proven to be true comes to light. ISO is necessarily accruing new costs, which have a direct
impact on the ISO's portfolio valuation.
The old ISO model
The narrowed gap
Traditional ISOs were designed to sell payment processing.
The ability to process the transaction itself was the value The merchant portfolios being built today are the
proposition ISOs provided to merchants. Transaction products of the sale, installation and support of
processing was sold to merchants via 1099 agents, W-2 customizable, sophisticated technology platforms that
salespeople or a combination of both. provide operational efficiencies, robust reporting, and
frictionless, multichannel consumer shopping experiences
From a market valuation perspective, the costs associated to businesses. Because of this, additional expenses are
with revenue derived from an ISO's merchant processing directly tied to the portfolio assets that didn't exist before.
portfolio would be tied, in many instances, directly to
the costs of the sales channel. This is because a portfolio A merchant portfolio and attendant sales channel can
acquisition typically contemplated carving out the no longer be pulled as a stand-alone asset. Payment
processing portfolio and the sales channel assets only: the processing is only part of the value ISOs are selling to
deal structure and valuation were based on a buyer being businesses. As such, all the costs associated with the
able to "pull" the portfolio and sales channel and "plug" technologies and transaction processing that ISOs are
them into its own ISO platform, leaving the selling ISO's selling need to be factored into the projected future cash
remaining operational costs behind. flows of the portfolio, in addition to the costs of the sales
channel, which ties directly to valuation.
Thus, the valuation of the merchant portfolio asset often
exceeded that of the entire ISO because ISO valuations, Thus, it is imperative that buyers model portfolio
for their part, were based on a more traditional valuation acquisitions as they would enterprise acquisitions; as the
methodology, whereby a company's valuation, or enterprise methodologies for portfolio and enterprise valuations
valuation, was based on a multiple of its earnings, before become comparable, so do the valuations themselves.
interest, taxes, depreciation, and amortization were
calculated out. Adam T. Hark is co-founder of Preston Todd Advisors and
MerchantPortfolios.com. With over a decade of experience in payments,
payments technology, and fintech, Adam advises clients in mergers and
acquisitions, growth strategy, exits, and business and portfolio valu-
ations. He can be reached at adam.hark@prestontoddadvisors.com,
adam@merchantportfolios.com or 617-340-8779.
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