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Anecdotes abound of ISOs and MLSs who this industry should sign an exclusivity agreement,"
Targen counseled. "It's not ideal for an ISO or agent to
discover, to their dismay, that an upstream ISO or have all their eggs in one basket. If the relationship
processor owns their residual streams and can sell goes south they're out of luck." Shepherd doesn't
them at will, paying the downstream partner who rule out exclusivity clauses, provided the agent is
sold the accounts a set multiple of compensated accordingly. "If you’re going to be
monthly residuals – if anything at all. exclusive with somebody you’d better be getting
something for that," he said.

Have an exit strategy • Non-solicitation clauses. These are commonly
intended to keep ISOs/MLSs from soliciting
Integral to the negotiation process is the need for exit merchants away from the processor with which they
strategies should an ISO, MLS or upstream partner want were boarded, or just moving signed merchants from
out of a contract, as well as an understanding of what that one processor to another. Such non-portability clauses
means for residual streams. "All too often, the ISO or agent can be a deal breaker for many small ISOs and MLSs.
doesn't consider how it [the relationship] is going to end," "Portability is the gold standard," Shepherd said. "This
Shepherd said. is why we have mega-ISOs."

What if an agent decides to retire, or worse, gets What if a merchant becomes dissatisfied with the
incapacitated? Contracts should guarantee residual processor, perhaps because the processor lacks
streams for as long as merchants the MLS signed generate technology or services they require? If an upstream
residuals for the upstream processor or ISO, Targen said. partner insists on a non-solicitation clause, include
language in the contract that allows the ISO or MLS to
That's not always the case, Shepherd added, stating, "The move merchants under certain, specified conditions,
question to ask is what happens if a year from now I'm Targen said.
hit by a bus and I can't sell – am I still guaranteed my
residuals? If they say yes, make them show you that in the • Residual stream ownership and verifiability.
contract." "Anything in a contract that says the residual can be
cut off is open for negotiation, and I'd negotiate real
Or what if an agent decides to sell a portfolio? Some hard on that," Targen said. It's also advisable to include
upstream ISOs and processors want a right of first refusal. language requiring residual reporting and steps for
Shepherd suggested this can work to an agent's advantage, verifying the accuracy of residual payments. "They
but only if the offer is for a good multiple. Targen advises should get detailed reports and [authorization to]
clients to instead offer a right of first bid. "It's up to the review the books to confirm that what they're being
agent to inform the ISO/processor of their intention to sell paid is accurate," she added.
and give them an opportunity to bid on it. If they like the
bid they can take it," she said. Many processors and ISOs want to impose minimum
payment amounts before sending out residual
Then there are forced exits. Anecdotes abound of ISOs checks. "There's no reason for that," Targen said. If
and MLSs who discover, to their dismay, that an upstream a processor insists on minimum payments, make
ISO or processor owns their residual streams and can sure they are realistic and for a limited period of
sell them at will, paying the downstream partner who time. Also, watch out for clauses stating residual
sold the accounts a set multiple of monthly residuals – if cuts can be reduced or eliminated if totals fall below
anything at all. Another variation is when the upstream an established minimum. "The contract should be
partner merges with another processor that the ISO/MLS very clear in stating that the ISO/agent shares in all
doesn't want to work with – perhaps because of past bad revenues derived from the merchant," Targen said,
experiences. adding that some ISOs and processors can and do
"monkey around with" this.
According to Targen, if an upstream partner sells its
business to a larger shop, ISOs and MLSs should have the • Limited liability and indemnity. Limited liability
option to sell their book along with the processor and get clauses limit the liability of one party to a contract.
paid for it, or continue to do business with the new owner. Large ISOs and processors will always seek to limit
Other gotchas to watch out for their liabilities when contracting with downstream
sales partners. But under no circumstances should
Here are additional pitfalls to watch for when negotiating this effect residuals. "It's really important that if there
with upstream ISOs and processors: is a limited liability clause, that an exception to this is
the payment of residuals," Targen said.
• Exclusivity clauses. Many processors want ISOs
and MLSs to sell for them exclusively. "No person in Indemnity clauses allow one party in a contract to sue

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