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Insights and Expertise
ChapterTitle
M&A in payments:
Selling a residuals
book of business
By Leo Arzumanyan
Global Legal Law Firm
ergers and acquisitions (M&A) in the elec-
tronic payments industry can be complex,
particularly when selling a residuals book of
M business is involved. This article will guide
you through the key steps, common pitfalls and essential
considerations to help ensure a smooth transaction.
A residuals book of business consists of the ongoing
revenue generated from a portfolio of merchant accounts.
Residuals are payments made to ISOs, agents or other
parties based on the processing volume and activity of
their merchant clients. Selling this book can be lucrative,
but the process requires careful planning and due
diligence. Following are pitfalls and things to consider in the M&A
process:
Key steps in the M&A process
Following are six key steps in the M&A process:
1. Valuation: The first step in selling a residuals book
is determining its value. Factors influencing this
include the stability and diversity of the merchant
portfolio, the average attrition rate, and the length
of existing contracts. Buyers typically look at histori-
cal earnings, projected future income and potential
risks. Professional appraisals are recommended to
ensure the valuation is accurate and aligns with mar-
ket expectations.
2. Preparing for sale: Before listing a residuals book
for sale, ensure all contracts with merchants are up
to date and assignable. Non-assignable contracts can
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complicate or derail a sale. Organize financial re-
cords, merchant agreements, and other relevant doc-
umentation. Transparency is key to attracting serious
buyers and negotiating favorable terms.
3. Finding potential buyers: Potential buyers could
include other ISOs, payment processors, private eq-
uity firms or competitors looking to expand their
portfolio. Engaging a broker with experience in the
payments industry can help in identifying qualified
buyers and managing the sale process.
4. Due diligence: Once a buyer is identified, the due
diligence process begins. This involves a thorough
review of financial statements, merchant agree-
ments, compliance with industry regulations and
potential liabilities. Both parties should be prepared
for an extensive back-and-forth during this phase, as
buyers seek to confirm the value and viability of the
residuals book.
5. Negotiating terms: The purchase agreement
should clearly outline the sale's terms, including
the purchase price, payment structure (for example,
lump sum or installments), and contingencies. Key
issues to negotiate include post-sale obligations,
earn-out provisions and non-compete clauses. In-
volve legal counsel with experience in M&A within
the payments industry to navigate these negotiations
effectively.
6. Closing the deal: After terms are agreed upon, the
deal moves to closing. This involves finalizing the
transfer of assets, updating contracts, and ensuring
all legal and regulatory requirements are met. De-
pending on the deal's structure, the closing process
may include transferring the residuals book to the
buyer, updating merchant agreements and notifying
merchants of the change in ownership.
Common pitfalls, important considerations
1. Overvaluation or undervaluation: Sellers often
face the risk of overvaluing or undervaluing their
residuals book. Overvaluation can lead to protracted
negotiations or failed deals; undervaluation results
in lost revenue. A professional valuation helps miti-
gate these risks.
2. Inadequate due diligence: Skimping on due dili-
gence can lead to unexpected liabilities or post-sale
disputes. Ensure that all aspects of the residuals
book, including compliance with payment industry
regulations, are thoroughly reviewed.
3. Contractual issues: Contracts that are non-assign-
able or contain unfavorable terms can significantly