‘It Was Actually a Blip’

Portfolio valuations proved they aren’t immune to the effects of the coronavirus. But brokers say merchant books have fared far better than many feared.

As the coronavirus pandemic drags on, its effects on portfolio valuations—especially valuations attached to portfolios with high concentrations of hospitality merchants—are beginning to stabilize. And buyers and sellers are adjusting to the new norms.

For sellers, that may mean adjusting the weight certain merchants carry and getting used to longer payout terms. For buyers, it could mean restructuring deals to adjust for the out-of-the-norm periods seen this year and requiring longer payout periods.

While the details of how merchant portfolios are valued and sold may have changed, the consensus is that the moves are temporary and intrinsic value remains constant. “I would not say the value has changed,” says Peter Michaud, director of consulting at The Strawhecker Group, an Omaha, Neb.-based payments consultancy. “There’s still a general sense of taking less risk. It’s very much a buyer’s market.”

Restaurants and other hospitality merchants may have endured worrisome revenue flows during the lockdowns earlier this year (“Cooking up a Comeback,” June), but many are rebounding.

“If you have a portfolio of all restaurants, certainly it took a hit,” says Denise Shomo, president of Cutter, a Wyomissing, Pa.-based buyer of portfolios. But “those restaurants seem to be back up and running,” she adds. “It’s amazing how quickly these merchants and portfolios have recovered. Industrywide we saw a significant drop in April and May, but significant increases in June and more in July.”

‘A Void Has Been Filled’

As Covid-19 restrictions eased in many states—coinciding with better weather that enabled outdoor dining in many locations—transaction volumes moved closer to typical levels. That helped hospitality merchants and the portfolios they’re a part of. But gaps remained for some portfolios, affecting their value.

“The void has been filled for most of my clients by increased volumes with merchants that were not severely impacted by the pandemic,” says Paul A. Rianda, principal at The Law Offices of Paul A. Rianda, Irvine, Calif. Rianda’s firm provides legal advice to independent sales organizations and other acquirers.

“Most of my clients reported major reductions in volume in April and May,” he says. “But as time has gone on, most have reported a steady increase in volume of their portfolios such that now many are reporting that their portfolios are about the same as before the pandemic started.”

Still, while volume has returned to the satisfaction of many, portfolio valuations will have to contend with the lingering impact of the pandemic.

In addition to looking at transaction volume and revenue, other considerations, such as geography, will be important, he says. A hotel in New York City and a hotel in Sioux City, Iowa, will have very different economics, he says. The Hawkeye state property may have a lower average ticket, but it also may have been more consistent than a property heavily reliant on the tourist trade. “That’s always going to be an impact,” Michaud says.

It’s important to conduct a holistic evaluation of a portfolio to see what’s happening with it and where it is trending, he says. “I’m not paying you because you made $1 million last year,” Michaud shares as an example. “I’m going to pay $2 million because it’s going to earn that over the next 18 months. Then I get everything on the upside.”

Partial Buyouts

Multiples are not lower either, says Shomo. But one primary aspect of buying and selling a merchant portfolio that has changed for some, albeit on a temporary basis, is the payout structure.

As an example, the upfront payments at closing may be less while the earnout may be enhanced, Shomo says. That could affect when the payouts are delivered or the percentage earned. This is done to give the portfolio in question time to get back to normal, she says.

Cutter has taken the step of analyzing the revenues generated during the peak of the Covid-19 lockdowns with the objective of quantifying the result so it won’t devalue the portfolio. “They took such a temporary hit,” Shomo says.

Another trend is the increasing use of a partial buyout. “If they’re not selling their entire portfolio, we buy a portion,” Shomo says. “Then, once residuals are paid every month, we ACH them every month the excess beyond what we paid.”

For example, an agent may have a portfolio valued at $20,000 in residuals. Cutter buys a portion of it. As the portfolio value creeps back up, the agent gets paid the amount left over after Cutter gets what it’s due.

Another change stemming from

the pandemic is that sellers now might be more interested in merchant diversification. “Sellers always emphasize the strong points of their portfolios and the pandemic has changed which attributes are attractive,” Rianda says. “Before, maybe it was restaurants that had an integrated point-of-sale system, whereas now e-commerce merchants might be more desired.”

‘A Viable Product’

Those portfolio owners who just started considering adding different types of merchants this spring may have been challenged, Michaud says. It’s not as if an acquirer can flip a switch to stop selling hospitality merchants and start selling utilities or government, he says. It will take time to get educated about the new market, what merchants need, and what they expect.

Many independent sales organizations, especially smaller ones, typically only sell into one or two merchant categories, Michaud says. “That’s where they’re most effective. If that is an industry adversely affected by the pandemic, they’re probably looking to expand.”

Rianda says many of his clients have continued to service merchants in the same verticals as before the pandemic. “But they have focused more on trying to assist…merchants with new technologies to allow them to accept more payments,” he says. “For example, sales agents servicing restaurants have rolled out software programs to help restaurants take online orders on the Internet and help with order delivery.”

Where many once placed a lot of value on the penetration of integrated point-of-sale systems in a portfolio, that may have changed, too, Rianda says. “Most of those were in the retail space. The value of that type of merchant in the future remains to be seen.”

The pandemic doesn’t appear to have negatively affected the appeal of merchant portfolios for investors, either. One reason is that electronic payments are resilient. And investors are always planning for the next big thing to go wrong, Michaud says. The 2020 pandemic was it.

“They’re always trying to measure risk in every transaction. That kind of risk just occurred,” he says. “That’s already happened.” As investors see it, electronic payments are resilient, he says. “That shows you this is a viable product with a lot of support when things go awry.”

And Shomo says the attraction for buyers has not changed significantly. “I see that buyers, at least Cutter, are looking at portfolios from different angles, but are able to get creative and flexible and make it fair and allow you to proceed with your buyout,” she says.

Generally, the impact of the pandemic does not appear to be long lasting. “In the last financial crisis, the portfolio values dropped significantly and took a long time to recover,” Rianda says. “That is not the case now. It does not seem like there are distressed portfolios out there pulling down values like the last time there was a large disruption in the financial markets.”

As for Michaud, he suggests portfolio activity will stay consistent. “Uncertainty and risk are the two biggest drivers going forward,” he says. The next 90 days, which includes the holiday shopping season and a presidential election, will be interesting to monitor, he says, adding, “Still, consumers want to use cards.”

Shomo, too, sees the impact on merchant portfolios as temporary. “We’re seeing portfolios re-energized and getting back to normal,” she says. “Businesses are obviously finding a way to survive. When Covid hit, we thought this was going to be a year or longer. But, it was actually a blip.”