Page 38 - gs260602

Insights and Expertise

What your merchant Drivers of portfolio valuation

In many cases, the concept of portfolio performance does
services portfolio is not even enter the conversation until the owner attempts
to sell or collateralize their residual for capital, and that is
really worth – Part 1 when they discover, often for the first time, what buyers
and lenders actually evaluate and what truly drives the
value of what they have built.

Over two decades in the merchant acquiring industry—
involving analysis of or transactions on more than 250,000
merchant accounts—I have evaluated portfolios ranging
from pure low-risk brick-and-mortar books to high-risk
specialty processing operations. The differences in how
these portfolios are valued—often by factors of 2x to 3x—
come down to a handful of measurable characteristics that
every ISO owner should understand.

When institutional capital evaluates a merchant portfolio—
whether for acquisition, financing or investment—it
focuses on six primary factors. These are not theoretical
constructs. They are the actual criteria we apply in our
portfolio credit analysis work, drawn from real diligence
engagements.

1. Attrition: The most critical risk factor
By George Csahiouni Attrition is the single most important variable in residual
Tripoli Advisors stream valuation. It determines how quickly a portfolio's
revenue erodes over time, and it is the first metric any
serious buyer or lender will examine.
Editor's note: This is the first installment of a two-part series on what
drives portfolio valuation and how merchant portfolios are being valued In our experience, portfolio attrition varies dramatically
today. The second article will appear in a subsequent issue.
based on merchant quality, industry vertical and servicing
infrastructure:
oo many payments ISO owners and agents
believe their portfolio is worth more than it is.
The ones who find out the hard way are those
T who walk into a sale or financing conversation
without understanding what buyers and lenders actually
care about—and it is rarely the number they expect.

The highest residual income does not produce the highest
valuation. The most durable, diversified, and well-
structured portfolio does.

As merchant portfolios are increasingly evaluated as
financial assets—by acquirers, lenders and institutional
investors—the factors that drive valuation have become
far more nuanced than most ISO owners realize. Gross
residual income is a starting point, not a finish line. What An important distinction that many ISO owners overlook:
matters is the durability, diversification, and structural attrition should be measured in both account count and
quality of the revenue stream behind that number. revenue. They are not the same, and both matter. An ISO
can lose a significant number of small accounts while
The challenge is that for most ISOs and agents, portfolio retaining its highest-volume merchants—producing low
performance is a secondary consideration—if it is a revenue attrition but high account attrition.
consideration at all. These are sales organizations by
nature. The focus is on winning the next account, not on Conversely, the loss of a small number of large accounts
how that account fits into a portfolio strategy. can produce devastating revenue attrition even when
overall account retention looks healthy. Sophisticated

38