“Bankcard ISO For Sale”- What Am I Really Buying?
In one of my meetings at a recent payments industry event I heard the one pronouncement that gets all the attendees frothing at the bit: “merchant processing ISO for sale”. Nothing gets the serial acquirers and investors in the bankcard industry more excited than those words. Buyers inquiring about ISO’s for sale represent > 50% of the inquiries our firm responds to on a monthly basis. Though there’s been much talk in the past few years about the commoditization of payments processing, ISO’s (quality ISO’s that is) are still very much in demand in today’s marketplace by both industry and non-industry acquirers alike.
As an expert payments industry consultant, I am often asked by buyers and investors to walk them through what the acquisition of a merchant processing ISO looks like. For sure there’s a need to clearly understand the process itself, and the deal terms, but what I often find to be the most interesting line of questions are those related to answering the “what are we actually acquiring” query.
A FACT WORTHY OF YOUR ATTENTION: The majority of merchant processing ISO’s that are sold transact as asset purchases, not stock purchases.
This tells us right away that when you hear there’s a merchant processing ISO for sale, the transaction may in fact not be an enterprise transaction at all.
I would venture that 9 out of 10 “ISO acquisitions” are characterized by the sale of the merchant processing portfolio and the attendant sales channel assets. Sometimes, there is buyer interest in parts of the acquired ISO’s general and administrative assets, however, that’s hardly a rule. The truth is that most investors, and this is not exclusive to the payments industry, prefer not to purchase the stock of an ISO due to potential tax implications and long term risk associated with liabilities that may or may not be known at the time of closing.
So here’s the takeaway: when you hear about an ISO for sale, your approach to the transaction should be from the perspective of making an asset purchase. As such, you should focus your evaluation and due diligence on understanding the two most valuable assets; the underlying merchant processing portfolio and the sales channel that produces the new accounts. NOTE: Evaluating a merchant portfolio surely requires a specialist, however the valuation itself typically bears out a highly accurate range. NOTE: The sales channel assessment also requires an expert hand due to the challenge of calculating the real costs associated with the operation of the sales channel.
…there’s one more thing you should bare in mind when looking to acquire a merchant processing ISO.
When entering into discussions about the pricing of the acquisition, you’d be advised to avoid discussing the ISO’s valuation in terms of the traditional “multiple of annualized EBITDA or FCF (free cash flow)”, and instead, try to account for the acquisition’s valuation by assessing the merchant portfolio’s future cash flows, and the potential growth of those cash flows as a function of the continued maintenance of the sales channel. As I noted above, in most cases the general and administrative costs are hardly ever wholly subsumed by the acquiring entity, and these costs can materially affect the EBITDA/FCF, making the more traditional enterprise valuation approach less applicable.