Merchant Processing ISO Sales: Why an Asset Purchase is the Preferred Deal Structure

Here’s a fact: over 90% of the M&A transactions involving the purchase and sale of a merchant processing ISO are structured as asset purchases (as opposed to stock purchases). Why is this? The simplest explanation has to do with liability issues, of which there are 2 basic types; non-financial liabilities and debt.

The advantage of an asset purchase over a stock purchase as it relates to non-financial liabilities is fairly straight forward. With an asset purchase, the acquiring entity can choose which aspects of the merchant processing ISO’s business it will be liable for on an ongoing basis. In most cases, the acquiring entity won’t want to be liable for any aspect of the target business and will expressly state as much in the purchase agreement, specifically that the transaction will be conditioned on the buyer acquiring the business free and clear of any non-financial liabilities, whether in the form of outstanding liens , legal claims, or otherwise.

The other type of liability which compels many ISO buyers to opt for an asset purchase over a stock purchase is financial liability, or debt; the outstanding financial obligations that the ISO has accrued over the lifetime of the company. The analysis of the financial debt obligations of a given merchant processing ISO requires a sharp eye and a certain degree of business sophistication. For the less discerning buyer, being dismissive of an ISO’s debt situation on the belief that it simply “isn’t my debt”, is a dangerous supposition to base an acquisition on. A proper analysis requires a buyer to be a bit more circumspect, and really dig into the balance sheet and profit and loss statements of the ISO.

What a buyer should be looking for in regards to an ISO’s debt situation is whether an ISO can support itself without debt financing. If an ISO requires debt financing to support its operations, it’s possible that it’s not in good financial health, and wouldn’t make for a good acquisition candidate, even as an asset purchase. However, not all debt is a deal killer, and in many cases, an ISO’s debt can be dealt with rather easily in a transaction. If a merchant processing ISO has debt obligations, by way of outstanding long-term loans for example, but is currently cash flow positive without a direct benefit from that debt financing, an asset purchase may be a solid way to go for a buyer. Particularly with long term debt, the ISO may have appropriated those monies many years ago, for example, back when the ISO was growing and needed more capital to build out a larger salesforce, and a larger office space to accommodate that salesforce. In this instance, the ISO no longer requires the capital for its day-to-day operations, and the remaining debt service would be paid off by the buyer from the buyer’s proceeds from a transaction.

All that being said, there are some good reasons why some merchant processing ISO sales are structured as stock purchases. Often times these involve a scenario where the ISO is not looking for an outright sale, but taking in an investor for an equity position. And other times, the deal is structured as a stock purchase because of tax and accounting implications.

Before you take your ISO to market, check with your attorney and tax advisor so you can understand the implications of both types of deal structures and get a consensus on what the best pathway forward will be.