From The Analysts


 Deal Types

by Jennifer Kane

   The value of a merchant business is dependent on several value drivers: existing merchant contracts, new merchant referral streams (i.e., distribution channels), infrastructure and the liabilities assumed, if any. There are several types of sales transactions that occur in the industry today that comprise these components to varying degrees.

Static Portfolio

   A static portfolio sale is simply the sale of a pool of existing merchant contracts that the buyer expects to attrite over time. These transactions do not include any referral stream or associated infrastructure. Often, ISOs pursue static portfolio divestitures to raise capital for ongoing operations. Typically, a static pool of merchants sells for approximately one to one and one-half times annual net revenue (i.e., gross revenue less interchange and assessments).

Portfolio Sale

   A portfolio sale includes the existing portfolio and typically some type of long-term referral and marketing arrangement with the seller. The buyer rarely assumes liabilities that are not associated directly with the merchant contracts (i.e., liabilities of the merchant acquirer selling the portfolio).
   The value associated with a portfolio sale stems from the existing merchant contracts, the referral stream, and the synergies that a buyer can bring. For example, a large, scale-driven acquirer can often shave off several cents per transaction in processing and operating expenses from a smaller acquirer's income statement. These synergies help increase the value of the portfolio to the buyer. The value of the synergies and the asset-oriented purchase can result in healthy valuations. Portfolio sales are typically valued at 3 to 4 times annual net revenue.

Going Concern

   A going concern sale is the sale of an operating company and typically includes the entity's personnel and associated infrastructure as well as the assumption of liabilities (e.g., debt, latent chargebacks, etc.). A buyer will pursue this type of transaction when it is looking for infrastructure such as back-office capabilities or proprietary technology. A seller will pursue this transaction when it is exiting the business (as opposed to raising capital).
   While the infrastructure associated with the going concern may increase the value of the entity relative to the portfolio on a stand-alone basis, the assumption of liabilities and other expenses associated with operating a company could lower value. For example, a buyer is unlikely to recognize expense synergies immediately from a going concern purchase since the buyer will likely operate the business as usual and will not convert the existing portfolio to a less costly platform or infrastructure. In addition, the buyer of a going concern may assume liabilities that it would not under a portfolio sale. Therefore, it is conceivable that a portfolio sale can be worth more to a buyer than the company as a going concern. In fact, a sub scale going concern is almost always worth less than the stand-alone portfolio. Considering all of these factors, the value for a going concern sale is wide and can range from two to five times net revenue.

   In conclusion, the value of a merchant business can range from one to five times net revenue and is dependent on the type of transaction, the intrinsic value of the assets being sold, and any detractors from value such as assumed liabilities.