Wednesday , November 20, 2019

How the Details Strongly Influence Merchant-Portfolio Valuations

Independent sales organizations and merchant-services salespeople considering selling all or part of their merchant portfolios have to consider more than finding the right buyer, said a panel of acquiring specialists.

While some portfolio valuations might spike as high as the 40s—referring to a multiple of the net monthly processing revenue—that’s not the case with all portfolios, said Vaden Landers, chairman and managing partner at Singular Payments, a St. Augustine, Fla.-based independent sales organization, and strategic advisor at MAPP Advisors, a merger-and-acquisitions firm based in Nashville, Tenn.

Speaking at the Southeast Acquirers Association annual conference in St. Petersburg, Fla., Tuesday, Landers said industry conversation about valuations in the upper 40s tends to focus on the number, and may promote unwarranted desire among some sellers for similar returns. But that doesn’t mean strong valuations aren’t there, he said, they just need to be justified.

Portfolio valuations are attractive and growing, Landers said, and multiples are near, if not at, the highest multiples he’s seen in his career. Such valuations are reserved for exceptionally performing portfolios that have positive growth prospects.

Indeed, portfolio sellers have to consider how buyers view portfolios to get a better picture of what to expect, said Steve Norrell, vice president of business development at ISO US Merchant Services Inc

“A multiple is one of the worst-used terms to figure out what you want to get,” Norrell said.

Factors such as attrition, merchant type, and whether the seller intends to continue to service the merchants following the deal play a role, too, he said. Other factors include merchant concentration and whether there are early contract-termination fees for merchants.

But a key question that helps determine the value is why the portfolio is put on the block, said John J. Rice, an executive at Louisville, Ky.-based Stream Cash, which specializes in portfolio deals. “The answer to that will drive the value of the portfolio,” Rice said.

A sale can result from partners splitting up, or a management-team exit, for example. If the portfolio is sold with the management team intact, it might attract a higher value because of the potential for continued growth, Rice said.

But retaining a portfolio might be a better option for some ISOs. “A perfectly acceptable time to sell is when you need help,” said Landers, such as when the payments industry is moving faster than the ISO or agent can keep up with, or when it starts to become harder to find deals.

Some, who are looking to grow their businesses, should consider keeping their portfolios intact and borrow instead, Norrell advises. A seller’s anticipation of a big payout may feel like winning a lottery, and the often misguided belief that the winner is rich, but he’s really not, Norrell said.

But if the decision is to sell, a few guidelines can help ensure the best value for the portfolio. One is to keep and maintain records of merchant contracts with processors and residual shares. “If they don’t exist that will devalue a portfolio,” Rice said. “It’s very important to keep track of growth, to keep track of your reps and lead generation.”

What isn’t so important any longer is a portability clause with the processor that enables the ISO or agent to move the portfolio to another processor, said Norrell. Landers, Rice, and Norrell agree that the typical preferred practice is to leave merchants with their existing processors.

Though most ISOs and agents lack portability rights, the valuation may go up for those who have it. “That said, no one wants to move merchants,” Landers said. “Portability is nice to have, but it’s an issue no one wants to move with.”

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