By Adam Atlas
Attorney at Law
Most of you, as ISOs and merchant level salespeople (MLSs), intend to sell your merchant portfolios at some point. And even those who are quite content to continue prospecting and pitching to win more accounts fantasize about how much their residual stream could fetch on the market.
In the course of representing both buyers and sellers of portfolios, I have seen the numerous pitfalls that arise in many portfolio sale transactions. I'll describe eight of these in the hopes that my efforts will help you avoid them.
1. No sale permitted under the contract: Some ISOs and MLSs are shocked to learn, after years of toiling to build a residual stream, that their agreement does not permit them to assign or otherwise sell the value they have built up.
Most processors will agree to some kind of permission to effect an assignment, but such negotiations can take a long time and can end up costing the seller in terms of exit fees the outgoing processor may wish to charge.
To be safe, make sure your ISO agreement has some rights of assignment of residuals or merchants, and periodically discuss with your processor how it sees those assignments actually working.
2. Just window-shopping: For buyers, the most frustrating part of looking for portfolios is meeting sellers who act like they want to sell, but when it comes time to start negotiating in earnest, it turns out they're just looking for an objective evaluation of their portfolio.
Some sellers also have an inflated perception of the value of their portfolios. This ultimately gets in the way of them ever selling out. And some buyers are merely fishing for information and lack the intent or ability to accomplish a buyout.
Whether you are a buyer or seller, don't mislead other parties into thinking you are more serious than you are. The industry is a small community, and acting in anything less than a forthright manner might diminish the value of your business.
3. Moving merchants instead of residuals: While many ISOs seek the right to actually deconvert merchants and move the corresponding merchant identification numbers to another acquiring bank, it is often better to simply sell a residual stream to an ISO that is already selling for the bank wishing to acquire the portfolio.
Moving merchants from one bank to another should be avoided whenever possible. When negotiating a sale that would require moving merchants, as an alternative, consider also negotiating a sale of your residual stream.
If you factor in the number of merchants you would lose when moving the portfolio, you might find that the two transactions are more similar than you previously thought.
4. No plan of deconversion: In an ideal world, an ISO moving merchants from one bank to another would have a face-to-face meeting six months before closing the deal with the outgoing bank, the incoming bank, and each of their processors and gateways to establish a plan of deconversion.
In the real world, there often is no time for that luxury. So, do as much planning as possible before you move a single merchant. Do testing.
Everything will take longer than expected, and complications will always arise. All parties should act reasonably and accommodate the time needed to move the portfolio in question.
5. Change of deconversion plan: Sometimes, after agreeing upon a plan of deconversion, the parties learn that it is useless in the field.
Here, the parties need to be reasonable and accommodate the needs of the party selling the portfolio to either allow more time to execute the existing plan or otherwise amend the plan to accommodate actual conditions.
Parties that are intransigent at moments of crisis will simply damage their goodwill in the industry, not to mention possibly do wrong by ISOs that have serviced them for years.
6. Attrition during deconversion: Imagine that an ISO walks into Bob's Auto Body and says, "Bob, I'm moving my business to a new bank; I'd sure like to bring your account with me." Bob replies, "You wish! Get lost. I'll be glad to work with someone else."
Inevitably, a portion of the merchants you wish to move won't follow you. Having a good relationship with them and pitching them on the advantages to the move will help any ISO retain a greater percentage of merchants during this kind of transition.
7. Nonsolicitation obligations violated: Anyone who pays a significant sum for your merchants will not want you to solicit those merchants to end their processing agreements after the sale. This is common sense. But unscrupulous sales organizations sell portfolios only to try to take back what they have sold.
Needless to say, intentionally moving merchants in blatant violation of a nonsolicitation obligation is a "capital crime" in our industry.
Despite the seriousness of the offense, this kind of wrong happens all too often. An ISO that is in blatant and intentional violation of its nonsolicitation obligations will not get much mercy from the aggrieved processor - or from the courts.
8. Delays in payment: If your selling price is a multiple of your monthly residuals, and the buyer takes a month to pay you after closing the sale, it's as if you sold at a lower multiple. So, when selling, carefully plan the timing of the sale and the payment terms.
Some buyers, especially on smaller purchases, drag out payments long past their due dates. Consider taking post-dated checks for all payments, so you have some tangible promise to pay in addition to the wording of the purchase and sale agreement.
You should, of course, keep in mind the business aspects of building and selling a portfolio: the number of merchants, the volume of processing, profitability, attrition, the nature of merchants and so forth.
And always have selling on your mind - from the moment you start shopping for an ISO deal.
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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