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Insights and Expertise

Why your ISO got passed over

for capital – and how to fix it

The diligence process typically examines the business
across several interconnected dimensions. Based on our
experience conducting operational diligence on behalf
of institutional investors, these are the areas where ISOs
most frequently fall short.
Financial reporting and controls
Capital providers expect clean, auditable financial
records—not just a QuickBooks file, but financials that
can be verified against bank statements, processor reports
and residual summaries. ISOs routinely fall short in their
diligence work in the following ways:
By George Csahiouni
Tripoli Advisors • Residual reporting performed manually rather
than through automated systems, introducing
he call usually goes the same way. A payments reconciliation errors. This is one of the most common
ISO owner or agent with a strong residual— issues—ISOs reconciling residuals by hand across
sometimes six figures a month—approaches a hundreds of merchant accounts on a processor
T capital provider for financing or explores sell- platform, producing errors that go undetected for
ing their portfolio. They expect the conversation to focus months. For any institutional investor evaluating
on their merchants, their revenue, their growth. Instead, a portfolio's data integrity, manual reconciliation
the first questions are about documentation, reporting, without automated verification is an immediate red
compliance infrastructure and operational continuity. flag.
And that is where the deal falls apart. • Accounting systems that are not scaled for the
business. Multiple ISOs are still operating on basic
Capital providers are not investing in your merchants. accounting platforms while processing hundreds of
They are investing in the systems, processes and discipline millions in annual volume. The decision to migrate
behind your merchants. If those don't exist, neither does to an enterprise system is frequently deferred until
the deal. a capital event forces the issue—at which point it
becomes an obstacle rather than a planned transition.
In our advisory work with merchant services ISOs across
the United States, my colleagues and I have encountered • Incomplete or inconsistent P&L presentation.
this pattern repeatedly. ISO owners and agents build Agent commissions, processing losses, chargeback
successful businesses—sometimes generating millions costs and equipment expenses are often categorized
in annual residual revenue—but when they approach inconsistently, making it difficult for outside parties
institutional capital, they discover that the way they have to assess the true economics of the business.
been running their business is not how capital providers
need them to run it. The standard institutional investors expect: financial
statements that can be independently reviewed by a CPA,
The gap between how most ISOs operate and what with clean reconciliation between reported revenue and
institutional capital requires is one of the most actual processor residual payments.
underestimated obstacles in the merchant services
industry today. And it is one of the primary reasons that Documented processes and SOPs
ISO owners and agents who attempt to sell or finance their
portfolios receive valuations significantly below their One of the most common gaps—and one of the most
expectations—or get passed over entirely. damaging to valuation—is the absence of documented
standard operating procedures.
What institutional capital actually expects
Many ISOs operate through institutional knowledge held
When a capital provider—whether a private credit fund, by a small number of key individuals. The sales process
a portfolio acquirer or an institutional lender—evaluates exists in the head of the sales manager. The deployment
an ISO for a transaction, they are not just investing in process exists in the head of the implementation lead. The
merchant accounts. They are investing in the systems, residual reconciliation process exists in the head of the
processes and discipline behind those accounts. accounting person. This creates two problems:

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