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The most valuable Think of it like this: you're looking at two
portfolios for acquisition, and each portfolio has
merchant portfolio 10 merchant accounts and throws off $1,000 per
month in residuals. In the first portfolio, each of
the 10 accounts throws off $100. In the second
By Adam Hark portfolio, nine merchants throw off a total of
$100, and one merchant throws off $900. The
MerchantPortfolios.com portfolio without the major revenue concentration
issue is, of course, a more risky acquisition. This
hat a useful academic exercise it would be example is extreme, but you can see why revenue
to cobble together the perfect portfolio: the concentration is weighted so heavily when it
one to which all other merchant portfolios comes to portfolio valuation.
W aspire. A variation of this exercise is com-
monly performed through "benchmarking," an analysis of 3. Processing platform: The idea that one
a subject merchant portfolio as compared with a premium processing platform is technologically or
book which is known to have carried a top valuation in functionally better than another is legitimately
the marketplace. Benchmarking is a highly effective tool debatable, but that merchant portfolios processing
for owners interested in maximizing the value of their on certain platforms will fetch higher valuations
merchant portfolios. It can show them where their port- than portfolios processing on other platforms is
folios are strongest and where they need improvement, as not. It's just the way it is.
related to valuation.
4. Account composition: Account composition can
But what if we were to indulge in this academic endeavor speak to two attributes of a merchant portfolio:
and build the perfect, most valuable portfolio? Where the ratio of card-not-present (CNP) merchants
would we start? First, we would need to identify the top to brick-and-mortar merchants and/or the
drivers of value in merchant portfolio sales. Second, we percentage of merchants within a certain industry
would need to know that for each of these drivers, there type within a given portfolio. These days, there
exists what the marketplace perceives to be the most are plenty of buyers for portfolios with both CNP
optimal range, value, type or level. and traditional brick-and-mortar merchants, so
Drivers wanted this aspect of portfolio composition isn't a top
driver of valuation.
Here are the six top drivers of merchant portfolio value in
today's marketplace: However, in a portfolio where a certain industry
vertical has been penetrated, and consequently,
1. Number of accounts: In case you haven't a material concentration of that business type
noticed, as a general rule, smaller portfolios trade exists in the portfolio, that book will be perceived
in a lower multiple range than larger portfolios. as being more valuable than a portfolio with
The operating principle here is risk concentration; an across-the-board admixture. Niche vertical
simply put, as the number of merchants in a penetration suggests there's something there
portfolio approaches zero, the inherent risk beyond the payment processing, often some
associated with the acquisition increases because form of business management solution or POS
the percentage of the total residual tied to each technology, or specialized knowledge about a
merchant becomes disproportionately larger. certain type of merchant. In both instances, this
usually translates into "stickier" merchants, and
Therefore, if a merchant is lost for any reason, this has a lot of value to would-be buyers.
there is a high probability a large portion of the
revenue may be lost as well. In larger portfolios, 5. Portfolio seller's plans: This driver is
the percentage of the total revenue attributable particularly interesting because it doesn't directly
to a single merchant account is usually much relate to the merchant portfolio itself. But if a
smaller, and therefore less risky to buyers. seller of a merchant portfolio is willing to commit
to manage the merchant accounts being sold,
2. Revenue concentration: Has anyone ever told offset future losses with new accounts or write
you your portfolio is top heavy? If so, the person new business with the acquiring party, this plays
was alluding to a revenue concentration issue. a huge part in the ultimate valuation.
When a single merchant, or group of merchants,
represents an extraordinarily large percentage 6. Attrition: The big one. The value driver of all
of the overall revenue of a book, the revenue value drivers in merchant portfolio sales. Think
concentrated therein must be addressed. about it: if you're trying to determine the value
of a portfolio by projecting its future cash flows,
30
The most valuable Think of it like this: you're looking at two
portfolios for acquisition, and each portfolio has
merchant portfolio 10 merchant accounts and throws off $1,000 per
month in residuals. In the first portfolio, each of
the 10 accounts throws off $100. In the second
By Adam Hark portfolio, nine merchants throw off a total of
$100, and one merchant throws off $900. The
MerchantPortfolios.com portfolio without the major revenue concentration
issue is, of course, a more risky acquisition. This
hat a useful academic exercise it would be example is extreme, but you can see why revenue
to cobble together the perfect portfolio: the concentration is weighted so heavily when it
one to which all other merchant portfolios comes to portfolio valuation.
W aspire. A variation of this exercise is com-
monly performed through "benchmarking," an analysis of 3. Processing platform: The idea that one
a subject merchant portfolio as compared with a premium processing platform is technologically or
book which is known to have carried a top valuation in functionally better than another is legitimately
the marketplace. Benchmarking is a highly effective tool debatable, but that merchant portfolios processing
for owners interested in maximizing the value of their on certain platforms will fetch higher valuations
merchant portfolios. It can show them where their port- than portfolios processing on other platforms is
folios are strongest and where they need improvement, as not. It's just the way it is.
related to valuation.
4. Account composition: Account composition can
But what if we were to indulge in this academic endeavor speak to two attributes of a merchant portfolio:
and build the perfect, most valuable portfolio? Where the ratio of card-not-present (CNP) merchants
would we start? First, we would need to identify the top to brick-and-mortar merchants and/or the
drivers of value in merchant portfolio sales. Second, we percentage of merchants within a certain industry
would need to know that for each of these drivers, there type within a given portfolio. These days, there
exists what the marketplace perceives to be the most are plenty of buyers for portfolios with both CNP
optimal range, value, type or level. and traditional brick-and-mortar merchants, so
Drivers wanted this aspect of portfolio composition isn't a top
driver of valuation.
Here are the six top drivers of merchant portfolio value in
today's marketplace: However, in a portfolio where a certain industry
vertical has been penetrated, and consequently,
1. Number of accounts: In case you haven't a material concentration of that business type
noticed, as a general rule, smaller portfolios trade exists in the portfolio, that book will be perceived
in a lower multiple range than larger portfolios. as being more valuable than a portfolio with
The operating principle here is risk concentration; an across-the-board admixture. Niche vertical
simply put, as the number of merchants in a penetration suggests there's something there
portfolio approaches zero, the inherent risk beyond the payment processing, often some
associated with the acquisition increases because form of business management solution or POS
the percentage of the total residual tied to each technology, or specialized knowledge about a
merchant becomes disproportionately larger. certain type of merchant. In both instances, this
usually translates into "stickier" merchants, and
Therefore, if a merchant is lost for any reason, this has a lot of value to would-be buyers.
there is a high probability a large portion of the
revenue may be lost as well. In larger portfolios, 5. Portfolio seller's plans: This driver is
the percentage of the total revenue attributable particularly interesting because it doesn't directly
to a single merchant account is usually much relate to the merchant portfolio itself. But if a
smaller, and therefore less risky to buyers. seller of a merchant portfolio is willing to commit
to manage the merchant accounts being sold,
2. Revenue concentration: Has anyone ever told offset future losses with new accounts or write
you your portfolio is top heavy? If so, the person new business with the acquiring party, this plays
was alluding to a revenue concentration issue. a huge part in the ultimate valuation.
When a single merchant, or group of merchants,
represents an extraordinarily large percentage 6. Attrition: The big one. The value driver of all
of the overall revenue of a book, the revenue value drivers in merchant portfolio sales. Think
concentrated therein must be addressed. about it: if you're trying to determine the value
of a portfolio by projecting its future cash flows,
30
