erminating an ISO agreement is like terminating a marriage. You never know whether it will be amicable or how hard the other party will fight for custody (i.e., of the merchants).

Most ISO agreements have an initial term (such as two or three years), followed by automatic renewals for successive one-year terms. Most also permit ISOs to terminate the agreement within a certain window of time (e.g., 90 days prior to the end of the then-current term). Every time that window approaches, ISOs consider whether that year is the year to exercise the right of termination. As an ISO, keep the following points in mind when thinking about exercising your right of termination:

Right to terminate

Check to make sure you actually have a right to terminate the agreement. Although most agreements do provide this, some do not.

Timing

Make sure that you get your timing right. Usually, the time that you can terminate comes around only once a year. When calculating this time, read the "Term" clause in your agreement carefully to determine whether you should count from the agreement's date or the agreement's execution date. Sometimes these two dates differ by several months.

Residuals

Perhaps the single most important question you need answered before terminating an ISO agreement is whether the outgoing processor will continue to pay residuals following termination. Many agreements provide for payment of residuals following termination, but those payments are often subject to conditions, such as continued merchant support. Take a close look at the entire agreement to make sure that there really are post-termination residual rights and that they are not unreasonably weak or limited.

Nonsolicitation of merchants

Processors typically require ISOs to not solicit merchants on behalf of another processor, particularly concerning the merchants who the ISO brought to the processor. If you intend to solicit your merchants after your agreement with the processor is terminated, do not expect the outgoing processor to make any residual payments to you on those merchants.

Going one step deeper, consider whether you are allowed to solicit merchants who, of their own volition, decided to terminate their merchant agreements with the outgoing processor.

These merchants are a source of many disputes over terminated ISO agreements. ISOs usually leave processors because of poor service or poor scruples. Merchants eventually catch on to these practices and will likely want to follow the departing ISOs. Be very careful not to violate your old ISO agreement nonsolicitation provisions when helping these merchants.

Nonsolicitation of agents

When terminating your relationship with a processor, if thinking about taking some of the other agents or ISOs of that processor with you, take a close look at your ISO agreement to see if you are allowed to do this. Most ISO agreements are weak on this point; however, even if the agreement does not prevent you from that kind of solicitation, still be careful that you are not liable for "tortious interference in contract." This is a general common law prohibition against inducing individuals to terminate contracts into which they have entered.

Even when you are not expressly prohibited from soliciting someone else's agents, this does not mean that the court will permit you to pilfer a processor's entire agent roster. Always act with prudence and moderation when your actions will affect someone else's business.

Noncompete/exclusivity

It's always important to think about exclusivity when first entering into an ISO agreement. But exclusivity becomes relevant again when exiting an agreement. Some agreements require ISOs to refrain from working or soliciting for a competitor for a period of time after the agreement has been terminated.

Although clauses addressing this issue do appear in ISO agreements, they are not necessarily legally enforceable. In other words, the law imposes limits on noncompete clauses, taking into consideration factors such as: a) geography (are you prevented from competing in only a few states or the entire country?), b) product type (are you prevented from selling any merchant services or only a specific kind?) and c) duration (i.e., six months or three years). Question the validity (and fairness) of any clause that prevents you from earning a living in the field in which you are trained.

Residual portability

Upon termination, you may wish to be bought out. Whether or not your agreement provides for a specific buyout price, most processors are willing to buy out an ISO if the price is right. The market varies wildly between 12 and 30 times the monthly residual payment and could easily vary outside those parameters. Carefully negotiate and document a residual buyout to avoid surprises. Watch out for processors that promise to buy at a certain multiple but then pay 30 days after you sell, thereby permitting them to earn one month of your revenue for free.

Merchant portability

In a few ISO agreements, ISOs have the right to cause the member bank to assign its rights in the merchant agreement to a third party. This is a right that may be exercised upon termination or at some other time, such as following the end of the agreement's initial term. Sometimes an exit fee accompanies this right. Once again, carefully negotiate and document the movement of merchants upon termination, or otherwise.

New relationship

If thinking of entering into a new ISO relationship upon termination of your old one, stop to think about whether the two relationships will conflict. For example, if the old relationship is exclusive, do not enter into a new one until the old one is officially over.

Many long-term, healthy relationships explode upon termination. Most of these explosions that I have seen occurred because the processor and ISO had wildly different expectations as to their respective rights and obligations upon termination. In order to avoid these explosions that can cost you years of work, keep a very open relationship with your processor. Also, have all promises made to you in writing, even by e-mail. Such documents will help you prove your understanding of each party's intent if a dispute ever arises.

Try to not make your ISO agreement termination anything like a divorce. Rather, it should be a proud moment when you finally get to exercise rights that have been laying in wait for years. Exercise these rights, however, with caution.

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.