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Education

Put investment capital Step one

to work to create To properly put capital to work, merchant acquirers must
first undergo a process of self-examination and assess-
ment. Optimizing investment capital to create long-term
long-term value value and produce meaningful growth isn't easy. For all
companies, there exist many pathways to do so – many
routes to get from point A to point B. But which pathway
(or pathways) a merchant acquirer chooses is largely a
function of how that acquirer is presently constituted as it
relates to its operational efficiency and competency, sales
and distribution channels, and product and service offer-
ings.

Understanding where one's business is strong, where it is
weak, and where it can thrive with additional resources, is
the first step in answering the question of how best to op-
timize investment capital. This process of self-assessment
by owner/operators is obligatory, and it must be brutally
honest.

This isn't an exercise in which owner/operators ought to
be thinking about how to put "lipstick on a pig" to bet-
ter present to investors. That would be the mistaken men-
By Adam T. Hark tality of an owner/operator trying to dress up a business
for sale in a short time period. For investment purposes,
Preston Todd Advisors it's about the long haul: it's understanding and accepting
what your business is today – the good, the bad, and the
erchant acquirers have always caught the ugly – and using that assessment as a basis for creating
attention of investors looking to put capital value via quality growth over (at least) a three-year time
to work. Recurring, predictable revenue will horizon.
M capture the eye of any sharp investor, and for
well over a decade now, investor interest has taken root in Step two
the merchant processing space.
Merchant acquirers must put forth a plan for the best
Consequentially, this has presented a rather steady flow "bang for their (newfound) bucks." This involves creat-
of opportunities for ISO owners, third-party processors, ing a framework for the "usage of funds." It must be ac-
agent offices, and merchant level salespeople (MLSs). In cepted that the primary objective for any business is qual-
fact, any level of acquirer who has built a quality merchant ity growth. In the merchant acquiring industry, generic,
portfolio, and owns a piece, if not all, of the residual stream run-of-the-mill growth means (all year-over-year) more
of the same, has the ability to (generally) avail himself or merchants, more volume, and (obviously) more revenue.
herself of outside investor capital. To the extent that the year-over-year growth is quality, I
would further qualify the aforementioned metrics to read:
This readily available supply and access to capital increased processing volume, higher margin (more profit-
provides acquirers very real opportunities to grow their able) merchant accounts, and most importantly, more mer-
businesses, "grease the skids" for long-term value creation, chant accounts that exhibit high retention rates.
and leverage themselves nicely for further investment or
outright exit. So then, how do owner/operators best allocate invested
monies to achieve quality growth? Conceptually, there are
Working off the premise, then, that merchant acquiring two general pathways for investment capital allocation
businesses possess inherent qualities that make them (usage of funds): internal and external.
the beneficiaries of readily available capital to grow their External: capital allocation to acquisitions
platforms, the key question for ISOs, agent offices and
MLSs naturally becomes: What's the best way to put this For most small to midsize ISOs and agent offices, growth
money to work to optimize return, procure meaningful through acquisition involves the purchase of a merchant
growth, and create long term value? In this article, I'll portfolio or the residual stream thereof. From a 30,000-foot
attempt to flesh out a high-level framework within which perspective, this seems to be a logical way to bulk up rev-
acquirers can best answer this question. enue provided they understand what they're buying and
acquire the asset at the right valuation so that they are as-
sured to get a decent return.
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