Looking to Sell your Merchant Portfolio?
Understand what comprises your portfolio valuation in order to optimize your opportunity.
If you’ve decided to sell your merchant portfolio, it’s in your best interest to do some homework before engaging with an investment firm. Of course, a key component of the merchant portfolio acquisition process is the portfolio valuation.
Since those looking to buy your merchant portfolio will conduct their own analysis, it’s best to undergo a pragmatic self-assessment. Here are a few tips for understanding what investors look for and what drives merchant portfolio valuation.
There are a considerable number of factors that collectively determine value, and each are interrelated. However, each is rooted in balancing the buyer’s opportunity and risk. It’s not just about residual streams.
What do portfolio buyers look for?
Number of Merchant Accounts
The number of accounts that comprise your merchant portfolio is a critical driver of value. Just like the old saying “Don’t put all your eggs in one basket,” it’s important to have a healthy mix of merchant sizes. If your revenue depends too heavily on a few very large accounts, that presents considerable risk should attrition occur. In other words, portfolio’s that generate the same amount of revenue with 1,000 merchants as one with just five will have a higher value. This is closely related to revenue concentration, as we describe a little later.
Age of Merchant Accounts
Newer accounts present more exposure because there’s not enough historical data for the underwriters to determine future profitability and stability. Older accounts offer more of a track record, tend to be better established businesses, and are less likely to leave their current payment processing provider.
This portfolio value driver can be a complex one, and some factors therein are somewhat subjective. A valuable account composition can be made up of a number of factors, including:
Brick-and-mortar POS versus card not present sales: Rapidly evolving technologies make for rapidly evolving consumer expectations. These factors aren’t easy to forecast, so it’s important to have a good mix of merchants.
Industry focus: As a payment merchant service provider or ISO, do you have a specialty or a strong penetration in a certain market or industry? This is valuable to a buyer, because it demonstrates stability factors such as loyalty and brand recognition. Also, it often indicates an understanding of that merchant group’s unique needs or the presences of value-added services. This is perceived as a lower risk of attrition and higher future opportunity.
Ratio of stable versus high-risk merchants: If you have a considerable percentage of high-risk merchants in your portfolio, consider using a merchant portfolio buyer who specializes in this area.
Having too much of your revenue being generated from just a few merchants will drive up risk – and drive down your portfolio value. This is closely related to the account composition; it’s important to balance the revenue sources. This risk is linked with number of merchant accounts.
If you’re considering selling your merchant portfolio reach out to Choice Capital to start your free portfolio valuation today.
Subscribe to the Choice Blog to receive our followup post, Maximizing the Value of your Merchant Portfolio: Part II, which will highlight other variables that affect the valuation of your merchant portfolio as well as a buyers wish list.
Author: Tony Capasso, Senior Managing Partner at Choice Capital Management, LLC. Choice Capital Management is an investment firm that specializes in payment processing, and focuses on providing liquidity and growth through strategic acquisitions in the payment processing industry.