Page 46 - GS180302

Education

Size Growth

Size is simple and doesn't require a lot of explanation. Small ISOs, as a func- No growth = no market interest. If
tion of merchant count, are not highly sought after. There's minimal, nominal your ISO is running at anemic, flat-
growth. They also require pushing the same amount of paper in a deal as larger line, or negative year-over-year, top-
ISOs, but without a commensurate payoff. line growth, your proverbial goose is
cooked. After all, what do you think
Furthermore, and the primary reason small ISOs don't attract would-be buyers, the primary driver for acquiring
is risk concentration. Small ISOs have small merchant portfolios (number of your ISO is? Some might ask then
accounts), which have an inherently high-risk concentration. As such, for most what about bottom line growth? Net
smaller ISOs, the cost/benefit analysis of the buyer makes it unlikely that they'd income? EBITDA?
be acquired.
Well, here's the thing, when a sophis-
ticated buyer looks at a payments
property with flat top-line growth,
but decent bottom-line growth, a
flag is immediately raised. The buyer
is going to rip apart the P&L, looking
for an explanation. In most cases, it's
because the seller, in preparing the
property to go to market, knew the
ISO had poor top-line growth and
started slashing expenses to pad the
bottom line. Now, it could be argued
that that in itself isn't problematic,
but if the expenses being slashed are
necessary for the continued opera-
tion of the business, then this strat-
egy kills any market appeal.

There is one exception to growth as a
market killer that's worthy of note. If
your company technically qualifies
as a payments processor but its pri-
mary product and service offering
is technology for certain verticals,
growth could be overlooked if, and
this is a big if, your technology has
the potential to produce a hockey
stick shaped top-line trend line for
revenue in the next 12 to 18 months.
This is not something we frequently
see, but we have been seeing it more
and more these days as increasing
numbers of ISOs are embracing tech-
nology via building it, buying it or
partnering with it.

Adam T. Hark is Managing Director of
Preston Todd Advisors. With over a decade
of consulting in the payments and finan-
cial technology sectors, Adam advises clients
on M&A, growth strategy, exits and business
and portfolio valuations. He can be reached
at adam.hark@prestontoddadvisors.com or
617-340-8779.

46