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Insights and Expertise

The aggregation premium: Why consolidation creates value

One of the most powerful dynamics in the current market is the
aggregation premium. When individual ISO portfolios are combined Four myths about merchant
into a diversified, institutionally managed platform, the resulting portfolio valuations
entity is worth meaningfully more than the sum of its parts.
As conversations about buying and selling
Strategic buyers—larger ISOs, payment processors, private equity merchant portfolios become more common,
platforms and fintech acquirers—assign higher valuations to diversified so do misconceptions about how valuations
platforms because the risk is lower, the infrastructure costs are spread really work. Here are four myths worth
across a larger asset base, and the combined scale attracts higher- setting aside.
quality capital at lower costs.
Myth No. 1: The highest multiple is always
This dynamic is one of the primary economic drivers behind the best deal.
the consolidation trend described in "The Great Payments ISO
Consolidation" (see https://tinyurl.com/4tpyzp3u). Well-capitalized A headline multiple tells only part of the
platforms that can acquire and aggregate individual portfolios will story. Earnouts, holdbacks, non-compete
continue to drive M&A activity across the ISO landscape, and the provisions and other deal terms can
valuations those sellers receive will be determined by the portfolio significantly affect what a seller ultimately
quality factors outlined in this article. receives.

What ISO owners should do now Myth No. 2: Every portfolio deserves in-
stitutional-level pricing.
For ISO owners who are not planning to sell in the near term, the
framework above still matters because the actions taken today and Stories about portfolios selling for 40x or
described below directly influence the portfolio's value in any future 50x monthly residuals often involve large,
capital event. diversified platforms with extensive infra-
• Measure your attrition. If you cannot produce clean merchant structure and access to institutional capital.
retention data by month, start tracking it now. Every acquirer and Most individual agent and small ISO port-
lender will ask for it, and the inability to produce it will reduce folios are valued differently.
your valuation before negotiations even begin.
• Evaluate your concentration. Run the numbers on your top 10 Myth No. 3: Buyers care only about
merchants, your top 10 percent of merchants, and your industry residual income.
vertical exposure. If any single SIC code represents more than 15
percent to 20 percent of your net income, you have a concentration Residuals are important, but buyers also
risk that should be addressed through diversified merchant evaluate attrition, merchant concentration,
acquisition. reporting quality, technology adoption,
processor relationships and other indicators
• Review your agent agreements. Understand the long-term cost of long-term stability. A strong portfolio is
structure of your agent compensation. If your payout ratios are about more than today's revenue.
trending upward or your agreements lack buyout provisions,
consider restructuring future agreements to preserve flexibility. Myth No. 4: Valuation matters only when
• Diversify your processor relationships. If you operate with you're ready to sell.
a single processor, explore adding a second platform. The
operational complexity is modest compared to the risk mitigation The decisions an ISO owner makes today—
and valuation benefit. from tracking merchant retention to
• Build institutional-grade reporting. Capital providers expect diversifying the portfolio—can influence
future value years before a sale or financing
clean financials, documented processes and transparent event. Understanding what buyers look for
reporting. The infrastructure gap between how most ISOs allows owners to strengthen their businesses
operate and what institutional capital requires is one of the most long before entering negotiations.
underestimated obstacles in the industry today—and one that
every ISO owner should address before it becomes a barrier.
Knowing how the market evaluates
George Csahiouni is the managing principal of Tripoli Advisors, a payments industry merchant portfolios helps owners focus
advisory and capital markets firm based in Scottsdale, Arizona. With 20 years of experi- on the factors they can control and avoid
ence in the merchant acquiring industry and involvement in over $1 billion in transac- being distracted by headline numbers that
tions and analysis, George advises ISOs, fintech platforms and institutional investors on may not reflect the economics of a real
portfolio strategy, operational optimization and capital markets. For more information, transaction.
visit tripoliadvisors.com. Contact George via LinkedIn at linkedin.com/in/george-
csahiouni.