Strategic Advisory in Payments
& Payments Technology

Selling Your Merchant Processing Portfolio, Residual, Or ISO: Reasons Why The Age Of Your Merchant Accounts Are Important

There are a few reasons why the age of your merchant accounts are relevant to the valuation assigned to your merchant processing portfolio, residual, or ISO. As a prospective seller, you should expect that the age of the accounts will be one of the many attributes a buyer will want to evaluate in determining the value of your book of business. There are certain inferences that can be drawn from the age of the merchant accounts that affect the risk of the acquisition to the buyer, and that will in turn affect the valuation. Let’s examine two scenarios:

Scenario #1: The merchant accounts are very mature (6-10 years old)

In this scenario, one may intuit that this is a positive quality. For sure there is an argument to make for this as the length of the merchant relationship can indicate a satisfied merchant who is content to remain with their processor. Additionally, that there’s a long transactional history for a prospective buyer to evaluate is always a good thing as the buyer can project more accurately what the merchant’s future transactional activity will look like. These qualities in of themselves do minimize risk and should figure as positives in the buyer’s evaluation (higher valuation).

Scenario #2: The merchant accounts are very young (less than a year old)

Again, in this scenario, one may intuit that this is a positive quality. The assumption being made (albeit incorrectly) is that if the term on the merchant contracts is a minimum of 36 months, the seller’s portfolio should fetch a high valuation because there’s a substantial amount of time remaining on contract term. Why is this not true and why does it in fact have a negative effect on a buyers valuation? First of all, it’s not true because there are NO guarantees that any merchant stays with any processor for any amount of time in the current marketplace unless there are other factors involved; usually a prohibitively high cancellation fee (good luck trying to get a merchant to agree to that in today’s marketplace) or the payments processing is part of a comprehensive POS/business management solution). The reason why the young age of the merchant accounts in almost every case results as a net negative pertaining to portfolio valuation is because a lack of transaction history is far more important to a prospective buyer. Buyer’s base their valuations on being able to accurately forecast future revenues from existing merchants. If there’s a short transaction history, the inferences a buyer can make about the future revenues of a merchant account, or portfolio of merchant accounts, is less meaningful, therefore less accurate and more risky, ultimately translating into a lower valuation.

There are other reasons why the age of the merchant accounts in your portfolio are important when determining the value of your book of business, however, the two scenarios I fleshed out above are the prime reasons.