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Insights and Expertise

buyers and lenders evaluate both dimensions, and the actively—not just during a sale or financing event, but as
divergence between the two often reveals the real risk an ongoing portfolio management discipline.
profile of a portfolio.
When a portfolio exceeds these thresholds, buyers and
From a buyer's perspective, attrition is the first input lenders adjust their valuation downward—sometimes
into any valuation model. A buyer projecting the future significantly. A buyer looking at a portfolio where the top
cash flows of a portfolio will discount the purchase price 10 accounts represent 25 percent or more of revenue will
directly based on expected attrition—and if the seller immediately model a stress scenario: what happens if two
cannot produce clean attrition data, the buyer will assume or three of those accounts leave?
the worst and price accordingly.
If the answer materially impairs the residual stream, the
The difference between a portfolio with 8 percent annual buyer will either reduce the upfront price, increase the
attrition and one with 18 percent can represent a 30 percent earnout component to shift that risk back to the seller, or
to 50 percent reduction in what a buyer is willing to pay, walk away entirely.
because the projected cash flow runway is fundamentally
shorter. Industry vertical concentration is equally important.
Certain industries produce strong residual income but
We routinely encounter ISOs whose blended attrition rates carry elevated compliance risk, regulatory scrutiny
exceed 20 percent annually, despite the owner's perception and processing volatility. Tobacco and vape retailers,
that the business is stable. Often, the issue is concentrated nutraceutical companies, travel agencies, firearms dealers
in the high-risk merchant segment—where annual churn and CBD merchants can generate attractive per-merchant
can run two to three times the portfolio average — revenue—but they also expose the portfolio to sudden
dragging overall retention metrics well into the High or processor termination, sponsor bank exits and regulatory
Critical range. Many ISO owners are surprised to learn action.
where their portfolio falls when measured rigorously
against these thresholds. We have evaluated ISOs where a single high-risk industry
vertical accounted for more than a quarter of total portfolio
Even where formal attrition reporting is unavailable, net income. Despite generating above-average revenue per
experienced evaluators can derive attrition from three merchant, that level of concentration creates a structural
sources: merchant account start and close dates, month- vulnerability: if the sponsor bank or processor exits that
over-month merchant count changes, and net residual vertical—which happens with increasing frequency in the
revenue trends. If an ISO cannot produce clean data on current regulatory environment—a significant portion of
any of these three dimensions, that itself is a red flag to the portfolio's income is immediately at risk.
capital providers.
From the buyer's perspective, vertical concentration is
If you don't know your attrition rate, you don't truly know not just a risk factor—it can be a deal-killer. A buyer who
what your portfolio is worth. acquires a portfolio with 25 percent to 30 percent of revenue
in a single high-risk vertical is inheriting a regulatory
2. Merchant concentration: The hidden risk liability that they may not be able to insure against. Many
Concentration risk takes multiple forms, and each one can acquirers will simply exclude high-risk verticals from the
materially reduce portfolio value. purchase entirely—buying only the low-risk portion of
Revenue concentration is the most straightforward. When the book—which means the seller receives value on only a
a small number of merchants generate a disproportionate fraction of what they thought they were selling.
share of residual income, the loss of any single account
creates outsized revenue impact. Geographic concentration is often overlooked but equally
material. Portfolios clustered in a single metro area or
It is not uncommon for the top 10 or 25 merchant accounts region are vulnerable to localized economic disruption,
in an ISO portfolio to generate 20 percent to 30 percent or competitive displacement by a single aggressive
more of total residual revenue—and for the top 10 percent competitor, or targeted agent poaching. Nationally
of accounts to generate well over half. When the average diversified portfolios carry meaningfully lower risk
residual per account is heavily weighted toward a small profiles.
number of high-volume merchants, the loss of even one or 3. Revenue per merchant: Quality over quantity
two accounts can have a material impact on the portfolio's
value. Not all merchants are created equal from a portfolio
economics perspective. In our cross-portfolio analysis,
The institutional benchmark we apply: top 10 merchants average net residual revenue per merchant varies
should represent less than 15 percent of total residual dramatically—from as low as $111 per month in high-risk
revenue, and the top 10 percent should represent less than specialty portfolios to over $600 per month in well-curated
50 percent. ISOs and agents should track these metrics low-risk books.

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