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Education

Legal ease: What's for sale anyway?

In decreasing order of substance, here's what an ISO may
ISO portfolio seller's be selling as part of selling an ISO business:

• ISO shares: When an ISO sells its company share,
checklist the buyer is buying the entire business, and the
corporate entity of the ISO becomes the purchaser's
property. In principle, the buyer inherits the ISO
with its various contracts and liabilities.

For example, if the ISO had contracts with two
processors, theoretically, those contracts remain in
place with the ISO after its shares are transferred to
the buyer. Note, however, that some ISO agreements
contain a "change of control" provision, meaning sale
of the ISO can occur only with the processor's prior
consent. Failure to obtain such consent may result
in the processor putting the ISO in default and thus
putting that company's value in jeopardy.

ISO purchase transactions rarely involve the sale of
shares. The main reason for this is that when you
By Adam Atlas buy a company, the company's liabilities stay with
Attorney at law it. If, in the past, the ISO took on a loan guarantee
or other liability, the ISO will be saddled with that
aving advised on a number of ISO portfolio responsibility after the sale unless it is specifically
purchase and sale transactions, I thought it released. ISO buyers therefore usually prefer to buy
would help to outline key items for an ISO assets, not shares.
H portfolio seller to consider before, during and
after a sale. For the purposes of this article, I will assume • ISO assets: By purchasing a defined list of assets,
that the selling ISO has already weighed the advantages the purchaser is usually able to avoid inheriting a
and disadvantages of selling. lingering liability of the ISO business being sold. Most
of the time, the key assets are the ISO agreements
Confidentiality with processors and the agent agreements that the
ISO has with agents.
Every portfolio buyer must conduct due diligence before
buying. Even with the most honest of sellers, buyers still Each of those agreements is usually reviewed as
owe themselves a duty, and may also owe their investors a part of the buyer's due diligence process to see that
duty to fully review the books and records of the portfolio the buyer is getting what he or she expects, with no
being purchased to see that they are going to get what surprises. Each ISO processor agreement and agent
they are paying for.
agreement purchased should be subject to an explicit
assignment. The assignment of an agreement means
Due diligence for ISO acquisitions often involves the seller substituting one party for another. For example, the
showing the buyer information related to the portfolio seller's company may be replaced with the buyer's
and ISO agreements, such as residual reports, merchant company as a party to the ISO agreements with
agreements, etc. Taking a careful look at the ISO agreement, processors.
the selling ISO will see that much of that information
(particularly the ISO agreement) is confidential and Buyers will usually not conclude a purchase until the
cannot be disclosed without permission of the processor processors in question have approved the proposed
that is a party to the ISO agreement. assignment. A buyer would be foolish to release the
purchase price without knowing beforehand that,
Before engaging in in-depth due diligence with the buyer, after closing, the residuals would be paid to the
the selling ISO may have to obtain permission from the buyer instead of seller.
processor to disclose information to the potential buyer.
Getting this permission is not usually a problem, but • Just residuals: Some buyers will simply want a
pressing ahead with due diligence without permission "residual redirection." This lesser form of purchase
may result in the processor alleging breach of the ISO does not directly involve the shares (share sale) or
agreement, which would put the residual sale in jeopardy.

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