Page 26 - GS180201

Education

Capitalizing on valuation variance Beyond the 'usual suspects'

of downline MLS portfolios Year over year attrition, revenue con-
centration, and SIC/MCC distribution
are widely recognized by the bank-
By Adam T. Hark card processing community (and the
M&A specialists who serve as brokers
Preston Todd Advisors to it) as primary drivers of merchant
portfolio and ISO enterprise valua-
ergers and acquisitions activity in payments is prodigious, and tion. And they are.
maximizing portfolio value in a sale has never been more impor-
tant. Though the heavy level of deal activity in the marketplace But to assume these "usual suspects"
M is a fairly current phenomenon (the past 18 months or so), there's account for 100 percent of a given
nothing particularly new about trying to maximize the value of our businesses property's value is folly. So much
or assets when we attempt to sell them. more goes into maximizing portfolio
value in a sale that owner/operators
In the merchant acquiring space, saleable properties are unique, and their need to understand, including dis-
worth is ultimately valued on the basis of primary attributes tied directly to tribution of accounts, processing vol-
the performance of the underlying processing portfolio: attrition, revenue ume, and residual revenue attribut-
concentration, and standard industry classification (SIC)/merchant category able to each and every downline MLS
code (MCC) distribution, for starters. writing new business for an ISO.

However, in such an active market, where demand is high, new buyers emerge, And it's with the downline agent
and by virtue of their expansion of the marketplace, these new buyers bring portfolios where we see a changing
new deal structures and the concomitant broadening of the primary attributes trend in the industry: new entrants to
that drive portfolio and ISO valuations. the marketplace – buyers of payment
portfolios and ISOs – are becoming
less sensitive to the risk associated
with the downline MLS/agent por-
tion of an ISO's merchant portfolio.

As such, brokerage firms are seeing
more deals where the acquiring party
is making offers on the gross residual
received by the ISO from its portfolio,
as opposed to traditional deal struc-
tures where buyers' offers were based
on the net residual received by an
ISO, after payouts to downline MLSs.
A new way to put deals together

To illustrate these new deal struc-
tures and how the MLS's portion
of an ISO's portfolio is playing into
valuation, let's assume a seller has
a portfolio generating $400,000 per
month in processing residual, but af-
ter paying out downline agents, the
seller's net is only $200,000.

Traditional portfolio-acquisition deal
structures contemplate the acquisi-
tion of the seller's portion only: mean-
ing the portfolio valuation is based
on a factor/multiplier of the $200,000
in residual the seller nets each month.

What we're starting to see in the mar-
ketplace is buyers looking to acquire

26