Strategic Advisory in Payments
& Payments Technology

The Counter-Intuitive, Paradoxical Nature of Large Merchant Accounts

It’s easy to imagine the exultation of an ISO owner or merchant level salesperson (MLS) upon the successful addition of a large merchant account to his or her portfolio. Whether that large merchant is card-present retail or card-not-present, is a single store or a chain of hundreds of locations, the elation one must feel having successfully sold that merchant must be wonderful. And let’s not forget why. Large merchants can be responsible for substantial increases in residual income to an ISO’s or MLS’s portfolio, and after all, isn’t that the point?

As someone who analyzes, values, and facilitates the purchase and sale of such payment properties for a living, I can tell you that large merchants have always been one of the more difficult aspects of a merchant portfolio to evaluate. If you think, from a seller’s perspective, that a single large merchant – or two or three of them – would be perceived as a boon to the overall valuation and sale price, you would be correct.

Over the years, most of the sellers whom I have consulted for firmly believe their large merchants merit pride of place in their portfolios. They also feel these merchants could not be viewed otherwise by someone looking to purchase their book or ISO.

An M&A paradox

It seems perfectly logical for a seller to feel this way. After all, why wouldn’t a seller think a buyer of an ISO or portfolio would want to pay big bucks for a large merchant account that will pad the buyer’s pockets with a ton of residual income? Well, let me introduce you to the counter-intuitiveness of the large merchant account: a typical portfolio or ISO seller’s perception that a big merchant with a big residual must equal a big valuation and payday when sold is false.

What we have here is a paradox: in the sale of a merchant processing ISO or portfolio, a large merchant that generates a large amount of revenue is worth less than a smaller merchant generating less revenue. This naturally leads to the question: How can this be? If a large merchant generates more money, it has to be worth more than a smaller merchant, right? But this is not the case.

‘Solving’ the paradox

The reason a larger merchant is worth less than a smaller merchant in an ISO or portfolio sale is a function of risk to the buyer. It’s that simple. We must remember that an ISO or portfolio is worth what a buyer is willing to pay for it.

In the case of portfolio and ISO sales, what a buyer is willing to pay is based on two basic calculations: the calculation of the future cash flows of the asset or enterprise, and the risk (reliability) of those future cash flows. So let’s take a look, by way of example, to see how a hypothetical large merchant figures into those calculations:

Hypothetical portfolio description

The portfolio we’re going to purchase:

  1. Comprised of 1,000 merchant accounts, mostly generic small to midsize enterprises, retail business, with very low chargeback ratios
  2. Generates $70,000/month in residual
  3. Has one large merchant that generates $10,000/month in residual (or 14.3 percent of the total residual)


  1. The portfolio’s historical attrition rate on revenue is running at 12.5 percent per year, so we’re going to assume future cash flows are tied to a 12.5 percent per year attrition rate.
  2. The market multiple paid on a merchant portfolio with a 12.5 percent yearly revenue attrition rate is running at 24 times the monthly residual, so the purchase price would be 24 x $70,000, or $1,680,000.


So the calculation of our future cash flows is easy enough. We simply apply a multiplier to the monthly residual, with the multiplier being based on a historical attrition rate of 12.5 percent (in truth, the future cash flows need to be discounted to account for the time value of money, but for our purposes here, this simple calculation will suffice).

But ask yourself this: how reliable, how risky, how predictable are those future cash flows when 14.3 percent of them are tied to one large merchant? What happens if that one large merchant is lost? The answer is the buyer’s predicted return on investment is “gone baby gone.” It literally creates a financial loss for the buyer that is impossible to recover from.

Therefore, the same multiplier that’s applied to the overall portfolio comprised of smaller merchants can’t be applied to the large merchant, which means that the large merchant a) receives a lower valuation than the rest of the merchants in the portfolio, and b) can pull down the valuation of the entire book of business.

Risky business

So it’s the risk associated with the loss of a large merchant that devalues that merchant, and in many cases, if the large merchant isn’t carved out of the deal, devalues the portfolio or ISO acquisition in its entirety. For sure, there are always work-arounds to address the risk associated with large merchants, but the educated seller should always be cognizant, going into a sale of a portfolio or ISO, that a large merchant, or group of large merchants, can be problematic. It’s worthy to note that this issue with large merchants isn’t specific to the merchant acquiring industry. It is something M&A professionals have to deal with in every industry, with every type of business. Whenever a large percentage of a business’s revenue comes from a single client, there is what we call a “revenue concentration” problem.

So, as a seller, you need to be aware of a revenue concentration issue prior to entering the sales process so you can think of ways to address it before you go to market. And, as an operator of an ongoing concern, you need to find ways to balance out the revenues of your business to help mitigate the potential downside if and when you do eventually decide to sell.