Most people don't think of a dollar of revenue as having any particular quality rating a dollar is a dollar is a dollar, right? Wrong. All dollars are not created equal. Let's take two extreme versions. First, I offer to give you a dollar one time only, to complete a chore. The chore has to be done within a short time frame and to my exact specifications. That's it, no other jobs to do, no second chances, just a dollar in exchange for your labors. In the second example, I offer you a dollar of revenue on the first of every month assuming you stay in business and help out from time to time, guaranteed. I know these examples are extreme, but I am sure you get the idea.
But wait, are these examples all that extreme? Isn't the first example like a commission earned on a POS sale and the second more like a residual payment? I think there are some striking resemblances, actually.
When evaluating your business, it pays to think in these terms. How good is your revenues stream? Does it depend on you being there every day, working the phones, solving problems, and making decisions? Are you the indispensable person in your organization? Or would things continue to roll on without a problem if, say, you were gone for a month. Better yet, would the revenue stream survive if you sold the business and were no longer working there at all?
These are the kinds of questions that possible buyers of your business would consider when evaluating your company. Buyers will rank one-time revenues lower than highly certain recurring payments. Some will disregard one time payments altogether. If you are building a company for the long term, then you are concentrating on high quality revenues - stable clients generating consistent payments.
One area of risk that many ISO's overlook is the credit worthiness of their processor or super ISO whoever is paying your residuals, that is. Most ISO's I know concentrate on getting the best pricing they can, without regard to other, more subtle long term issues like credit worthiness. But what would happen to your residual stream if your processor (or more likely super ISO) were to declare bankruptcy? Think that's impossible? So did a lot of Enron shareholders! Like it or not, processor credit worthiness is a real issue, and one which may become more important in coming months or years.
Have you pulled a credit report on your processor? It might be worth the fee. You can find business credit reports at a reasonable cost from Dun and Bradstreet.
There are other methods of deducting value from the residual payment stream does your processor have a good reputation among the merchant base? Are they operating in an ethical fashion with you, other ISOs and merchants? Most do, but there are examples of super ISO's or processors who are not working in good faith. Recently, the Federal Trade Commission shut an ISO down for fraudulent dealings. Residual streams from such ISO's are worth next to nothing since no one wants to work with them. Their behavior is well known to anyone close to them, and the merchants especially actively seek alternatives. This means attrition rates are high in these portfolios, and that diminishes value faster than any other variable. If you make a multi-year commitment to a processor or super ISO, make sure that the results of your work - the residual stream - are the best that they can be. There's no sense in building a residual stream that has no value.
The provisions of your ISO contract will also influence the value of your residual stream. Look for tricky buyout clauses in your contract. Often super ISO's will try to write into agreements buyout clauses that give them the right to stop you from selling to a third party. Or they try to force a sale to them at favorable prices and terms. In any sale of your portfolio, you would, no doubt, prefer to have more than one potential buyer. But that is exactly what your processor or super ISO does NOT want. Make sure you don't trade off favorable pricing for an onerous buyout clause in your contract.
Other provisions of your contract can also influence the value of your portfolio. Complex performance requirements or continuing sales requirements are often difficult for a buyer to deal with and can be deal killers when it comes to a sale. A commitment you make at the beginning of your ISO career can become a fatal burden to the buyer of your portfolio five years later. Any contract that requires continued selling or other such performance requirements to keep your residual stream in place is one of which you should be wary.
Complexities within the merchant base itself can diminish portfolio value, including merchant concentration in the revenue stream. When one, or even a few, merchants account for a disproportionate share of the total residual, then the buyer will perceive greater risk in the portfolio, which can diminish the price. Merchants who require special needs in servicing, such as foreign language support, can also diminish price.
These are just some of the factors to examine when evaluating a residual portfolio's quality. Each of them directly affects the purchase price of a residual stream. As you build your business, consider these factors and others as you go to make sure that when your buyout opportunity arrives, you are able to maximize it.