Why Small Merchant Processing Portfolios & Residuals Trade At Lower Multiples Than Larger Ones (Part II)

Continuing on from my last blog, here’s a 2nd reason why smaller sized merchant processing portfolios trade in a lower multiple range: risk concentration.

Let’s use the example from the previous blog to help illustrate this point. Imagine we’re looking at 2 merchant portfolios, 1 with 10 merchant accounts and 1 with 1,000 merchant accounts. Each portfolio is throwing off $20k/month in residual. Intuitively you know that the merchant portfolio with 1,000 merchant accounts is a lot less risky to acquire because the revenue is distributed among a much greater population of merchants. Conversely, you know that to acquire the merchant portfolio with only 10 merchant accounts would be extremely risky as the revenue is distributed among a very small population of merchants; if you were to lose just one merchant, you could throw your revenue projections for that portfolio right out the window.

This is why smaller portfolios (portfolios with a small number of merchant accounts) trade in the lower multiple range. The substantially higher risk associated with the merchant portfolio as a result of it’s size (risk concentration) results in a downward pressure on valuation.