The Green Sheet Online Edition
September 9, 2015 • 15:09:01
Sharks and sharps: Who's buying your bankcard business?
For years now the bankcard space has been, and continues to be, a hotbed of merger-and-acquisition activity. Whether at the merchant portfolio or residual level or at the platform level with merchant processing ISOs, plenty of opportunities always exist for buyers and sellers alike.
For those who deal with these kinds of transactions professionally, as intermediaries, there exists the constant need to not just understand and evaluate sellers and sellers' properties, but also the need to understand potential buyers. And for any sellers looking to bring their property to market themselves, that is, "for sale by owner," the ability to properly evaluate potential buyers is of the utmost importance. It can also be extraordinarily challenging.
A little analogy
In the world of card playing, particularly poker, we often hear the terms "cardsharp" and "cardshark" mentioned together in reference to highly skilled players who benefit from exploiting the less informed and less adroit players.
However, in the American lexicon, there seems to have evolved a nuanced distinction between the two terms: cardshark often is not used as a pejorative, but rather as an affirmation that a card player has reached a very high level of play through practice and experience, and although a superior player, the cardshark still approaches the game with a sense of integrity and fair play.
Alternatively, a cardsharp has come to denote a card player who has also reached a very high level of play through practice and experience, but the cardsharp applies that learned gamesmanship in a less than honest manner, often availing himself or herself of deceitful practices that go unnoticed and unchecked by the novice player.
Shark v. sharp: Who's who?
So to apply the card player analogy to sellers of bankcard portfolios and ISOs, and the buyers of these assets, we need to create a profile of these two classes of buyers we frequently face at the other side of the negotiating table. We can then use these as templates to help us better understand who we are dealing with when entering into discussions involving portfolio or ISO sales.
- The portfolio shark: Portfolio sharks are defined by their knowledge, professionalism, ethical standards and discipline. The sharks usually have a background in finance and grasp the basic concepts of the time-value of money and future cash flows, return on investment (ROI), internal rate of return, and net present value. They also know how these financial pieces come together to form a cohesive model that allows sharks to understand the most important aspect of the deal: ROI.
Sharks also possess the wisdom to know that no deal is a good deal unless it works for both buyer and seller. Sharks are generally more objective, letting the financial modeling dictate their decision-making process, and very rarely will take negotiations personally. The sharks play for the long term, have made prior acquisitions and will make future acquisitions, and won't allow themselves to compromise their future ability to transact by overstepping ethical boundaries.
Sharks are disciplined, sometime to the point of ruthlessness. They always know what they can pay, and what they can't pay, and will never veer from their guiding principles (in many cases, the math). Lastly, sharks should be respected. The sharks are lean, mean, buying machines and if you haven't boned up on your Finance 101, you may want to seek counsel from a consultant so that you can negotiate with sharks on equal footing.
- The portfolio sharp: At first blush, portfolio sharps appear to have many of the same traits as portfolio sharks. They, too, are very knowledgeable and disciplined. They are inherently financial animals and work within a strict framework for valuing the bankcard properties they seek to acquire.
Although they subscribe to a similar strategy as sharks when it comes to merchant portfolio and ISO acquisitions (seeking the highest ROI), they differ greatly from sharks in their tactical approach to deals and how they maneuver with sellers. To untrained, and often, unfortunately, unwitting sellers, portfolio sharps are illusionists, seeking to exploit sellers' lack of knowledge. They often manipulate numbers and financial concepts to lure sellers into deals that aren't what they appear to be.
Sharps also tend to create and present deal structures in a Byzantine manner, and even for the most sophisticated sellers, the ability to truly understand the nature of the transaction is severely compromised.
Sounds like there is no good option for sellers, right? No, not right. And here are the reasons:
- There are other types of buyers besides portfolio sharks and portfolio sharps. For example, there is the first-time, novice buyer who has never made any type of acquisition before and who is, in at least experience and knowledge, on more equal footing with a first-time seller. There is also the nonacquiring industry buyer who wants to break into the merchant processing game and needs to secure a go-forward relationship with a seller because of a seller's knowledge of the industry.
In both these examples, the disadvantages, such that they are, of having to negotiate with a shark or sharp, are minimized. However, it should be noted that the shark and sharp are two of the more common buyer types you'll run into, and it will serve you well, at the very least, to be able to recognize them for what they are.
- Secondly, and I believe more importantly, there is a preferred buyer type to go with here. The shark is objective, logical and efficient, and can be dealt with in kind. Although sharks should be respected, they should not be feared, for they operate in a more honest and straightforward manner, which in truth, should be your single biggest takeaway from this article: knowing that most merchant processing ISO and portfolio acquisitions involve some form of future relationship between the buyer and seller, wouldn't you want to be in business with the really intelligent, disciplined, logical buyer who didn't try to exploit you?
Get in the game, play your cards right
If you are going to market with your bankcard property, understand that part of the process involves a bit of self-education in addition to the normal, and expected, "dressing up" of your bankcard property, merchant processing ISO, portfolio or residual stream. Part of that self-education process means putting yourself in a position to be able to recognize the type of buyer you're dealing with.
The other part of that self-education process involves providing yourself with the resources necessary to navigate successfully through the negotiations with that buyer. So do your homework, get on out there and don't be afraid of the game. And to all of you sellers out there, good luck!
Adam Hark is co-founder of MerchantPortfolios.com, a dba of Preston Todd Advisors Inc. With over a decade of experience in the payments industry, Adam specializes in M&A, growth and exit strategies, and asset and enterprise valuation for payments processing and payments technology companies. Adam Hark can be reached at adam@merchantportfolios.com or 617-340-8779.
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