Buying Or Selling A Merchant Portfolio: Are Revenues From Merchant Fees And Assessments Valid, And Should They Count Towards The Merchant Portfolio’s Valuation?

An interesting question if ever there was one. When determining the value of a merchant portfolio, whether you’re buying one or selling one, a lot of industry folk ask me whether or not the merchant fees and assessments are figured into the valuation of that merchant portfolio. The short answer is: yes, some of it, and not all the time. In other words, generally yes but with some caveats.

Let’s take a closer look at some of the most common types of fees and how they figure into determining a merchant portfolio’s value:

1) Annual Fee: Absolutely should be figured into the overall valuation of a merchant portfolio. Why? Because the buyer is going to benefit from this fee as well.

2) PCI DSS Compliance Fee: Absolutely should be figured into the valuation of a merchant portfolio. Why? (see number 1 above) It should be noted though that from a buyer’s perspective, if the merchants you are purchasing are not currently being assessed for this fee, there may be greater upside for you in the acquisition once you get the merchants compliant. If you’re a seller and think that goes the other way too, don’t! If your merchants aren’t compliant when you put the merchant portfolio up for sale, you can’t and shouldn’t expect a buyer to pay you more because they might be in the future.

3) IRS Reporting Fee: (see number 2 above)

4) Cancellation Fee: A big fat NO. Why should a buyer pay you for losing an account? If you have a large merchant portfolio and are generating a substantial amount of cancellation fees every month you have a distressed portfolio and may want to focus on correcting the problem before you go to market.

5) Monthly Minimum Fee (the fee a processor and or sponsor bank assesses to the merchant for having an active account with them): This is an interesting one. ‘Yes’ if the merchant account is processing and potentially ‘no’ if the merchant account is not. Here’s the deal, many buyers (not all) will discount any and all revenue originating from non-processing accounts because it is believed (and history generally bears this out) that non-processing accounts will not be active for any extended period of time; the merchants eventually realize they’re paying $25 per month or so for nothing because they’re customers aren’t paying with credit or debit cards. Now I did say not all buyers and that generally depends on the percentage of accounts in the portfolio that are non-processing. As a general rule, if the percentage of merchant accounts in the portfolio that are non-processing is less than 10%, buyers won’t fuss too much. However, if it’s greater than 10%, be forewarned that they may discount the monthly fee revenue from the non-processing accounts.

And number 5 is a great segue into a larger point: if there is a large percentage of non-processing accounts in your portfolio, any and all revenue from those accounts maybe discounted or not figured into the valuation of the portfolio, including annual fees, PCI DSS fees, and IRS reporting fees. Yes, you may make the argument that these merchant accounts are ‘locked-in’ because of terminal leasing or some prohibitively large cancellation fees, but I’m telling you, don’t waste your time trying to sell that argument to a prospective buyer. The reality is that revenue from non-processing accounts isn’t quality revenue. Buyers know that and so should you!