By Adam Atlas
Attorney at Law
Portfolio sellers all too often encounter enormous surprises when they embark upon selling a residual stream or merchant portfolio. Sellers are entitled to a measure of certainty as they go through a sales process, especially in today's hard economic times. This article provides several tips on how to avoid costly dead ends and detours when the time comes to sell your portfolio.
Your ISO or merchant level salesperson (MLS) agreement should include some kind of right to sell your portfolio's residual stream, merchants or both to a third party. Which of these rights you have will be a function of your bargaining position with either the processor or the ISO with which you work.
These rights are usually accompanied by:
A number of ISOs and MLSs do not have written into their agreements the right to sell the merchant accounts or residuals they acquire under said agreements. This makes defining and selling their rights under those agreements that much harder.
If you have difficulty obtaining consent for a sale, consider that your ISO or processor might not be acting unreasonably, especially if any rights you may have to sell your residuals or merchant accounts are not specified in your agreement.
Before revealing anything of substance to a potential purchaser, have the purchaser sign a nondisclosure (confidentiality) agreement, also known as an NDA. An NDA is a straightforward, three or four page document. It prevents parties to the agreement from using the information they receive under the agreement for a certain period, such as three or five years.
An NDA also usually requires the receiving party to destroy or return information if the parties do not conclude a sale. When entering into an NDA and when thinking about the information you may disclose, keep in mind the confidentiality obligations you have to the processor or ISO involved.
For example, revealing your Schedule A (the section of your ISO or MLS agreement that specifies the terms of your compensation) is most likely a breach of your ISO or MLS agreement. All purchase transactions involve potential breaches of confidentiality obligations; be very careful not to breach those obligations.
Sellers should always speak to more than one buyer. Terms of purchase vary from one buyer to the next, depending on their access to capital, level of risk tolerance, ability to support the purchased portfolio and other factors.
Believe it or not, even in today's difficult times, potential buyers exist. If you retain a broker to shop your portfolio, make sure you know how much the broker will charge beforehand.
A seller is entitled to know what range of multiples a buyer is willing to pay, based on certain assumptions, such as the number of merchants, type of merchants, attrition, dollar and transaction volumes, platform(s) used and concentration of merchants (for example, whether there are 480 auto repair shops in a 500-merchant portfolio).
Many sellers reveal significant detail about their portfolios before knowing the kind of price a buyer is willing to pay.
Some purchasers (as well as some sellers) are merely trying to get a sense of the market and not actually make a deal. Hold off revealing sensitive information until you are confident of dealing with a bona fide buyer. Consider speaking with the buyer's bank or lender to assess the seriousness of the buyer.
Never mislead a buyer or reveal so little as to make your portfolio uninteresting, but consider limiting your disclosure to what is essential.
Whether or not your processor or ISO has a right of first refusal over your portfolio's sale, obtain the processor's or ISO's consent for the right to disclose information to a potential buyer.
The last thing you need on the eve of closing a portfolio sale is a notice of breach of contract from your processor for violating your confidentiality obligations. Reasonable processors will grant consent to give information to a potential buyer, perhaps requiring said buyer to sign an NDA with the processor.
Whether you are selling only residual rights, moving your merchants to another bank or doing something in between, develop a plan for the transition. Make sure all relevant parties have input into the plan and agree to its general terms.
Some portfolio sales are done with no plan at all, which can result in material attrition and loss of the fundamental value of the portfolio for the seller or the buyer. The migration plan should cover issues like the technical aspects of downloads, if necessary, as well as who will service the merchants going forward.
Avoid scenarios in which the purchaser of residual rights leaves the seller with support obligations. This leaves both parties in awkward positions.
If you are selling a portfolio, do not expect to have the right to solicit the merchants within that portfolio for a long time (many years). Some sellers mistakenly believe they can sell a portfolio and then solicit the merchants they have just sold. Apart from being just plain wrong, that usually amounts to a breach of the buyout agreement.
Sellers should know that buyers are spending less money these days; the multiples that were available a year ago are not available today.
The sale of a portfolio is the culmination of years of hard work. As ISOs and MLSs, you owe it to yourselves to plan for this event from the outset. Think of your merchant portfolio as a painting that requires you, the artist, to do more than slap paint on canvas. You have to carefully consider the colors and composition to generate the best results.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.
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