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Education

the entire processing tion, and revenue concentration – the variance in valuation between Portfolio 1 and Portfolio
revenue of the portfolio. 2 would be stark as a function of size (number of active merchants). The risk concentration of
Using this same portfo- Portfolio 2 is much greater than Portfolio 1 as a function of its small size, resulting in Portfo-
lio as an example, that lio 2 necessarily trading in a lower valuation range. Thus, when contemplating a transaction
would mean the buyer where an ISO's gross residual is being purchased, the valuations of the downline MLSs' por-
would be looking to ac- tions of the portfolio would not be equal.
quire the entire $400,000
per month. Sellers would If the ISO's owner assigned a standard, one-size-fits-all buyout formula to all of his or her
then work out the buy- downline agent portfolios, the ISO owner could lose out on a lot of money in the transaction.
outs of the downline How? Remember, this is a gross residual buy, so the buyer would assign a multiplier to the
agents' portions of the gross residual amount before the ISO pays out downline agents. For the sake of this example,
portfolio. let's say the multiplier is 40. So if the ISO owner has to buy out all of his or her downline
MLS' portions of the portfolio at 40X, the ISO owner is losing out on the valuation variance
As a direct consequence of the downline MLSs' portions of the portfolio, because many or most of those smaller,
of this, the risk associat- downline agent portfolios aren't worth 40X.
ed with the agents' por-
tions of the portfolio rev- Allowing for gross residual purchases
enue requires much more What does this mean? ISO owners today need to anticipate the possibility of gross residual
scrutiny, particularly of purchases and account for that potentiality in their agent and MLS agreements. In a portfolio
an often overlooked and deal where the gross residual is being purchased, ISO owners need to have already included
ignored factor in tradi- buyout formulas in their agent agreements addressing the inherent valuation variance in the
tional portfolio acquisi- downline portfolios.
tions: the contractual
relationship between an This can be established by creating multitiered valuation ranges in the MLS agreements
ISO and its MLSs. based on the specific portfolio attributes of each downline's book of business: number of
A tale of two accounts, total processing volume, etc. All ISO owners should take a close look at their agent
portfolios agreements and discuss with an industry specific attorney or consultant the insertion of a
framework that addresses this.
To maximize portfolio
value in a sale, owner/ Adam T. Hark is Managing Director of Preston Todd Advisors. With over a decade of consulting in the payments
operators need to re- and financial technology sectors, Adam advises clients on M&A, growth strategy, exits, and business and portfolio
think the contracts with valuations. He can be reached at adam.hark@prestontoddadvisors.com or 617-340-8779.
their downline MLSs
to account for valuation
variance. To understand
this concept, we need
to accept the following
premise as true: all agent
books are not worth the
same. By way of exam-
ple, let's imagine taking
the following two MLS
portfolios to market:
• Portfolio 1: 200 ac-
tive merchants and
a monthly residual
(after split with ISO)
of $15,000.
• Portfolio 2: 30 ac-
tive merchants and
a monthly residual
(after split with ISO)
of $1,500.

Assuming the primary
attributes of both portfo-
lios are the same – attri-
tion, SIC/MCC distribu-

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