Change is afoot in the merchant acquiring business. People seem to get into this industry with the specific intent of getting out by building up and then selling off. And with merchant portfolios seemingly as fungible as pork belly futures, why not? Who doesn’t dream of that pot of gold at the end of the rainbow?
While portfolio buyouts and entire company enterprise mergers and acquisitions are nothing new, we have found that the pace of such transactions is accelerating. Perhaps the diminishing number of sponsor banks has trickled down to the ISO level and forced compression. Possibly technology costs have led companies to the
inescapable conclusion that they cannot compete on a smaller scale.
Maybe it’s just that industry players want to get out while the gettin’s good. Whatever the reason, there’s a lot of merger and acquisition activity going on.
If you are thinking that such a deal may be in the works for you, read on. The sale of a merchant portfolio or an acquiring company presents issues that are significantly different than the sale of
other assets and businesses. Below are six questions you should
keep in mind while contemplating
the sale of a merchant portfolio or acquiring business.
What do you want to sell?
There’s always the choice between selling part of a merchant
portfolio, all of a merchant portfolio, or an entire company.
Selling your company is a very different deal even than selling all of your merchant portfolio. If you sell the portfolio, whether to raise money to fund future business or to get your (and your
investors’) seed capital out, you will stay in business and continue to work under your existing processing agreement. Typically no merchant conversion takes place and the merchants continue processing with your current processor. On the other hand, the buyer may want to convert the merchants to its processing platform to enjoy the benefits of greater volume, but check whether your processing agreement permits this.
Selling your entire company will get you a greater multiple, because goodwill (your company’s reputation and name), sales rep relationships and company expertise are also being sold. We’ve seen situations where the buyer is more interested in the sponsorship relationship itself (such as a dedicated BIN) than the merchant contracts. So the motivation in buying the company is to obtain that favorable relationship. If you were savvy enough to set your company up that way, don’t underestimate the value of that “asset” in the sale.
A purchase/merger transaction is much more involved than a portfolio sale, because there are more assets and contractual relationships to take into consideration.
What kind of company do you want to sell to?
Typically, the processor will have some sort of right of first refusal on a portfolio sale. Pay close attention to the technical requirements in your contract when obtaining a waiver from the processor, if applicable. It’s often easiest to sell directly to the processor if you can work out the economics, because this will eliminate attrition of the portfolio.
Another option is to sell to a company that is on the same front and back end processing platform that you have been using. If you can find someone who has the same processor your merchants are using, consider this a bonus. It will eliminate the headache of converting merchants, which could involve downloading every merchant’s terminal or requiring merchants to sign a new merchant agreement, which is expensive and time consuming.
What will you get in exchange?
The most lucrative deal will give you all the money up front. But that happens rarely in the acquiring world. More typical is that you will get some cash up front and then the remaining amount of cash at some point in the future, usually in 12 months or so. During this lag, the buyer has the right to offset against that future cash payment anything you may owe to the buyer, such as amounts incurred for trailing chargebacks.
More and more, however, cash/stock deals are being struck. In these, the seller gets a certain amount of cash at closing, and a certain amount of stock in the buyer company. A cash holdback still may be part of the picture. There are lots of potholes to watch out for in this scenario. When receiving stock instead of cash you essentially are acting as an investor in the buying company, and you should insist on obtaining representations and warranties from the buyer to back up the stock you will receive.
What will be your personal role after the transaction?
This one is paramount in the entire company sale scenario, but also comes up in a portfolio sale. If you have strong personal relationships with the merchants, at the very least the buyer will want you to stay on for awhile to transition the relationship from the old company to the new one. It’s not uncommon for the buyer to want your expertise, generally, for a year or two, or even longer— your expertise may be an attractive asset the buyer wants to maintain. Dig deep here and figure out what you are willing to do after you have sold, so that you come to an understanding about this with the buyer right up front.
What kind of guarantees can you live with?
It’s hard to argue that you should not be liable for chargebacks related to card transactions that occurred prior to the closing date. If you have risk liability, that is.
More difficult is to figure out whether you are willing to owe some of the purchase price back to the buyer if the portfolio experiences a certain amount of attrition or excessive chargebacks over a 12 month period. This may depend on the nature of your portfolio: if the portfolio has a low loss rate, you may be okay with guaranteeing this to the buyer. If you won’t be able to sleep at night knowing that one large merchant termination or loss will do you in, you should sell the portfolio “as is”, with language specifically spelling out that you are not guaranteeing the attrition rate or revenue that will be generated from the portfolio.
Whose consent do you need?
This is the issue that gets glossed over but that takes the most time to sort out and has the greatest potential to gum up the deal. Look at all of the contracts involved in the sale to determine whether you are free to assign a particular agreement to the buyer.
ISO or sales representative contracts may contain mandatory buyouts or consents. Same thing for agent bank and association
agreements. It’s likely that you struck a different deal with each
sales entity, because this is the provision that they really pay attention to when signing up with an acquirer. So look at each contract individually to determine what is required.
Even if you don’t need their consent, you will still need to legally “assign” some contracts from you to the purchaser. If you are a party to the merchant agreement, the merchant agreements usually can be globally assigned from you to the buyer, but you may need to send a letter to each merchant (or notify them via merchant statement) that the contract has been assigned to the buyer.
These are some of the big-picture issues to keep in mind when selling an acquiring portfolio or business. Of course every deal has its own peculiarities and stress points (unfortunately, usually discovered as you near the closing date). You’ve worked hard to get to the point where you can cash in: now you should take the time to negotiate the deal that maximizes the value of your company.
|
