October 5, 2011

Planning Boosts Portfolio Value, Experts Say

SAN FRANCISCO – Entrepreneurs often start ISOs with the goal of someday selling their merchant portfolio for a large sum and retiring to live the good life.

With that in mind, a panel of experts here at the recent Western States Acquirers Association 8th Annual Conference described ways to establish and maintain a portfolio’s value.

Building a portfolio’s value is not easily, but proper planning can help, the panel of experts generally agreed.

A healthy merchant-services portfolio requires a solid equity base to survive difficult times, said Harold Montgomery, chairman and CEO of Dallas-based Calpian Inc. And building a portfolio takes longer now than in the recent past because of the poor economy, he added.

Already having a strong merchant portfolio helps ISOs find financing when credit is tight, as it is now, noted Darrin Ginsberg, CEO of Corona Del Mar, Calif.-based Super G Funding LLC.

As such, newer ISOs are resorting to a “hybrid” financing model, where they might sign up 25 merchants per month but keep 15 for the residuals they generate and sell 10 to raise capital, suggested Montgomery.

Forming the right relationships also makes sense, panelists agreed. When establishing an ISO, entrepreneurs should choose processors that serve the types of businesses the organization is pursuing, they said.

The ISO also should sign on only with banks likely to last “for the long haul,” advised Greg Cohen, president of U.S. operations for Toronto-based Moneris Solutions.

Moreover, aligning with a processor well regarded in the industry can pay off in added value when an ISO decides to sell a portfolio, noted Montgomery.

A contract signed with a processor should not prevent an ISO from reaching any of its goals, cautioned Ken Musante, president of Eureka, Calif.-based Eureka Payments. Otherwise, a prohibitive clause in the agreement could dash any hope of selling the portfolio as planned.

“Talk to a professional” before signing, Musante cautioned.

In fact, fledgling ISOs should hire a lawyer who specializes in the acquiring industry and thus knows what to look for in a contract, cautioned Ginsberg.

Product mix also affects a portfolio’s value when it comes time to sell, said Montgomery. Many ISOs understandably want to sell anything that makes money, but having too much gift and loyalty business in the mix makes the portfolio more difficult to sell, he noted.

“The further you get from processing, the harder it is to liquidate,” Montgomery told attendees.

Still, ISOs should move beyond simply processing Visa and MasterCard card payments and instead broaden their processing capabilities by supporting new technology, including mobile, as it comes along, Cohen said.

And gift and loyalty cards add value because they help retain customers, noted Ginsberg.

Collecting too much in fees devalues a portfolio, too, according to Musante. When fees approach 40% of the portfolio’s revenue, the ISO is jeopardizing valuation, he said.

Potential portfolio buyers look beyond revenue figures and the number of merchants in the portfolio, Ginsberg said. They want to see a reassuring distribution of revenue production among the merchants because income derived from just a few merchants poses a risk, he said.

Moreover, merchants processing only a few transactions have little to lose by leaving and thus also constitute a risk, Ginsberg noted.

Some prospective buyers compare a portfolio’s merchants in a particular month to those still signed up a year later to reveal the underlying attrition rate, said Montgomery. If merchants are staying on, that contributes to the portfolio’s value, he contended.

Astute potential buyers segment a portfolio into the most valuable and the least valuable merchants for further analysis, noted Cohen.

Source: ISO & Agent