Selling Your Merchant Portfolio: Why And When Do Processors Buy Back
When trying to negotiate an acquisition of a merchant portfolio with an inexperienced seller, it’s not unusual for a seller to get “tripped up” with the first right of refusal provision written into their processing agreement. The first right of refusal language exists to ensure the processor has the option of buying the merchant portfolio before seller takes that merchant portfolio to market. As discussed in previous blog posts, the language of the first right of refusal can vary greatly from the ‘lenient’, whereby the processor’s conditions for exercising their option to purchase the merchant portfolio are very reasonable and don’t impede on the seller’s right to transact in a timely manner when going to market, to the downright prohibitive, where the processor makes it extremely difficult for the seller to go to market. Fortunately, most processor agreements fall into the former category.
It’s important for sellers to understand what drives a processor to exercise their first right of refusal so that sellers can anticipate the probability of that occurrence. This is very important when negotiating the sale of a portfolio because many buyers don’t want to engage with a seller of a quality portfolio opportunity if they feel there’s a high probability that the processor will buy it back. As such, here’s an insider’s comments on the ‘why’ and ‘when’ processors exercise their option to buy back one of their ISO’s merchant portfolios…
Simply put , processors will buy back a portfolio when they have a strategic interest to do so. But, more specifically:
1) To keep the merchants on their platform: If a processor suspects the merchant portfolio will be acquired and moved (ported) away from their platform, that typically drives them to more aggressively pursue a buy back. In most cases, the portfolio is being sold to a third party who uses the same processing platform (i.e. the merchant portfolio being sold is processing with First Data, and the buyer is processing with First Data too), however, if the buyer is utilizing a different processing platform from seller, then those merchants in the portfolio aren’t just being moved, they’re being lost, and lost merchants equals lost revenue.
2) When the portfolio being sold has unique attribute(s) which are strategically beneficial to processor: Merchant portfolios are unique in their merchant composition in terms of types of businesses, location of businesses, size of businesses, etc. In some cases, the particular attributes of a portfolio may have strategic value to the processor. For example, if the portfolio being sold has a large geographical foot print in an area where the processor believes it has weak penetration, the processor may be inclined to take a more aggressive tack in pursuing their first right of refusal so as to protect themselves against exposure to that particular deficiency. The same can be said for certain types of businesses and sized merchants (more often than not large merchants and/or chains). Any one of these unique merchant portfolio attributes can be a driver for the processor to buy back.
It’s important for sellers to remember that most first right of refusal language permits the processor to submit an offer for the portfolio that a third party buyer has to top. However, the processor’s ability to buy back the merchant portfolio isn’t absolute. Sellers should always be aware of how their processor views the sale of their portfolio so as to be able to properly set expectations among prospective buyers as to the probability that the processor is going to make a strong play to buy the portfolio back.