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Education

StreetSmarts SM

Steve Feldshuh

“Talk To Steve”

The sale of a portfolio

By Steven Feldshuh three years. Basically, the processor feels if you want to get
Merchants' Choice Payment Solutions East paid in full, you must continue to produce and maintain a
fixed level of attrition on your accounts.
ost of us in the ISO world feel we own the
accounts in our merchant portfolios. What As an ISO involved in a portfolio sale, the first question
an ISO actually owns, however, is the per- that came to mind was, how much money should we
M centage of residuals promised to the ISO keep in-house to insure we survive over a period of time
from the processing entity. Merchant accounts are under until new production kicks in? Unless you're closing your
contract with the acquirer, which, in most cases, is the business, having enough capital to cover a minimum
bank. of two to three years of current operating expenses is
important.
So when merchant level salespeople (MLSs) say they don't
want to sell their accounts when a portfolio is being sold, Additionally, though it may appear at first glance that the
they fail to realize the accounts don't belong to them. profit to the ISO is high, that isn't necessarily so. Everyone
They have merchant relationships, they receive residuals, needs to profit, including the ISO, but with a sales force
but account ownership isn't theirs. They have no say if a in the street to support, it is nowhere what people think.
portfolio is being sold.
Typically, an ISO has loans to repay. In our industry, it
My sales office recently completed a portfolio sale. takes a huge initial investment to operate, especially in the
Our agreement had a provision stating that if our first three to four years. Think about how long it would
processor sold a certain percentage of its business, our take for residuals to cover a monthly nut of say $50,000,
residual portfolio automatically would be included. The when the office residuals grow by maybe $500 a month,
contract also contained a promised multiple, which we eight months out of the year, and the income falls off or
had agreed years earlier to modify downward due to experiences no growth four months out of the year.
changing portfolio valuations. Many years ago, I heard of
ridiculously high multiples offered by processors. Those Spending $50,000 monthly seems high, but when you
days are gone unless a portfolio is immense or specialized; consider business location, salaries, rents, as well as the
even then, the multiples paid are not what they once were. cost of insurance, furniture, computers, Internet, phones
and paper supplies, it all adds up. If you own another
The complexity of payouts business with space you can use for free, it helps, but you
still have every other cost associated with a business.
So how does one determine what a fair payout is for the
ISOs and MLSs who have written a portion of the accounts Factors affecting multiples
being purchased? In speaking with several people on the
subject, I found several factors affecting the determination How does one determine multiples for payment, without
of multiples. making all the decisions based on personal thoughts or
friendships? The best way we found was not to assign
First, not all the money is generally paid out upfront. names to portfolios. Instead, we based the multiples on
Agreements typically require an attrition clause and the following:
continued production. A hold back can exist for two to
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