any ISOs and merchant level salespeople (MLSs) envision one day selling their portfolios, collecting a fat check and playing golf into the sunset. As you know, much work and worry lie on the road to that goal.

When someone wants to buy your portfolio, the processor with which you have placed your merchants will inevitably be very concerned about the continuity of service to the accounts involved. This column highlights important aspects of merchant service that you, as ISOs and MLSs, need to bear in mind when negotiating new contracts or buyout agreements.

Who decides?

If you are an MLS selling a portfolio of 500 merchants, I'll bet you want the right to decide whether you will continue servicing those merchants after you receive your buyout payment. For an MLS who wants to leave the business or retire, continuing to service the merchants is definitely not an attractive option. Consequently, you should always negotiate so that you will have the right to select who will service the merchants if you sell out.

The candidates

There are essentially three options a seller of portfolio rights will have concerning merchant servicing:

1) If the processor agrees, the processor may assume the servicing obligations in respect to the merchant portfolio.

2) If the portfolio purchaser and the processor both agree, the purchaser may take up the servicing obligations.

3) If the purchaser and processor agree, the seller may continue to service the merchants.

Processor servicing

If the processor agrees to take up the service obligations for the portfolio being sold, the processor is very likely to charge a per-merchant monthly fee in exchange for services. That fee will reduce the amount of residuals the portfolio's purchaser is likely to receive and therefore reduce the portfolio's value and purchase price.

Depending on the processor, having the processor assume servicing obligations can be advantageous to the buyer because the processor is already familiar with the merchant portfolio and the platform on which it operates. Processors may also see opportunity in this option because they can turn customer service into an additional profit center.

Purchaser servicing

Whether a purchaser is willing or able to assume merchant service obligations depends on the purchaser's individual circumstances.

Some processors are averse to having purchasers service portfolios because purchasers with a variety of portfolios do not always have the necessary expertise and knowledge of each specific processor platform in use. Thus, they often aren't equipped to adequately service all of the merchants in their portfolios.

Some purchasers are sophisticated, however, and have effective servicing skills that can complement most processing platforms.

Processors also may hesitate to let certain purchasers service their merchants because they may be in direct competition with one another. For example, large processor A would likely not want large processor B to be one of its agents or support providers.

Some portfolio purchasers will even pay residuals on new merchant locations for merchant accounts that have already been sold to them. This is an option processors sometimes withhold from ISOs and MLSs.

Seller servicing

Sellers remaining in the business or selling only part of a portfolio are most likely to keep servicing the merchants involved after a sale. This kind of seller is probably looking for financing to grow an existing business.

For these kinds of sellers, servicing a portfolio would not result in a material increase in costs or inconvenience because they already know the merchants in question very well, and they are operating as ISOs or MLSs. Sellers exiting the business or retiring should not agree to continue to service merchants in a portfolio they are selling because that continued obligation defeats the purpose of selling out - which is to cash out of the business.

Make it clear, in writing

A lot of ISOs and agents get to the point of signing a portfolio sale agreement without having given much thought to merchant servicing. The allocation of merchant service obligations should be set out clearly in any buyout agreement. This will help avoid disputes and unwelcome surprises.

Buyouts come in a range of forms. At one end of the spectrum is the simplest kind of buyout in which a buyer simply buys the residual stream of a sub-agent. At the other end is a buyout in which the buyer assumes all the contractual rights and obligations of the selling ISO or MLS and causes the outgoing acquiring bank to assign its interest in the merchant agreements to a new acquiring bank.

Where your deal fits into this spectrum will be a function of:

1) your business needs in the deal

2) the market's interest in the portfolio

3) your bargaining power vis-“-vis the processor and purchaser.

Define obligations

Make it very clear in any buyout agreement exactly which obligations of the selling entity will be assumed by the parties concerned: the seller, the purchaser and the processor.

Buyers are actively shopping for portfolios. Each decision to sell is motivated by a variety of reasons, such as the need for financing; interest in exiting the business; a dispute or inability to make a new deal with a portfolio's processor; or other personal or business reasons.

Regardless of your reasons for a proposed sale, reflect on who will take over servicing the merchants in question. A portfolio that is not adequately serviced will not last long and will frustrate any purchaser.

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.