Strategic Advisory in Payments
& Payments Technology

Selling Your Merchant Portfolio: Beyond The Numbers

Everyone in the merchant acquiring space has heard of “attrition”. And most everyone in the merchant acquiring space has heard of “revenue concentration”. These are primary drivers in merchant portfolio valuation. They are both quantifiable as well, meaning they are determined by mathematical calculations of data included in the merchant processing residual reports you receive from your processing partner. However, there are a host of other attributes of your merchant portfolio that are not defined by, nor can they be determined by, the merchant residual data. These attributes are defined and determined by the contract you signed with your processing partner. This contract, or ISO Agreement, you entered into can have a significant effect on the valuation and marketability of your merchant portfolio.

Let’s take a look at a couple of contractual elements of an ISO agreement that can materially affect the sale of your merchant portfolio:

1.) Exclusivity: Somewhere in your ISO agreement there exists language regarding the obligation you have to your processing partner regarding the writing of merchant accounts. Today, most ISO agreements provide for a non-exclusive relationship between the ISO and processor. This affords the ISO the flexibility to write merchant accounts for other processors and/or ISO’s. This is very important when it comes to selling your merchant portfolio because in most merchant portfolio acquisitions, the deal is structured in a way that the seller has to offset revenue or account attrition by writing new business. This new business is to be written through the buyer, and pursuant to the terms of the buyer’s ISO agreement. If your ISO agreement does not make this provision, then you are exclusive with your processor. Exclusivity can often make the deal a lot less attractive to potential buyers, as buyers prefer that all the new business is written through their platform and processing partner. This allows for the buyer to ensure that new business is written with their pricing, and that they own the primary relationship with any new merchant accounts (this is a de-risking strategy).

2.) Term: The term of the agreement you have with your processing partner is also very relevant to your ability to sell your merchant portfolio, and necessarily, the valuation you receive. The term, however, unlike exclusivity, indirectly affects your merchant portfolio. By this I mean that the term of on your ISO agreement often dictates the time frame for how other contractual elements operate, as in how long there’s exclusivity, and in the case of portability, dictates how long before the merchant accounts in your portfolio become portable. Most buyers, if they assume your ISO agreement as part of the portfolio sale, don’t want to be beholden to the contractual agreements you made with your processing partner, especially if they’re encumbering and inject greater risk into the merchant portfolio acquisition.

These are just two factors of your merchant portfolio that go beyond the numbers and data, which can materially affect the way a buyer views your portfolio for acquisition. In some cases, they can be non-starters for a buyer. The takeaway should be that before you consider going to market with your merchant portfolio, speak with a qualified consultant about these issues. By addressing these types of issues early, you will put yourself in a better position for a successful transaction by being able to identify specific buyers who may be more willing to accommodate your merchant portfolio offering, contractual encumbrances and all.