Merchant Residual Valuation: Know What They Are NOT Worth
The ‘Holy Grail’ of most inquiries regarding the value of a merchant portfolio or a merchant residual has been, and remains to be ,how much are they worth? For the new buyer, or the seller who is entering the market for the first time, lesson #1 in terms of understanding the value of these types of properties is quite simple: merchant portfolios and merchant residuals are worth what buyers are willing to pay for them. Lesson #2 is that they’re NOT worth what you heard they’re worth. What I mean by that, and this could almost be characterized as urban legend within our industry, is that far too many sellers (yes you!) think your merchant portfolio or merchant residual has a minimum valuation of 36 times net monthly processing revenue because that’s what you heard your buddy got, or your buddy’s buddy got, from a buyer (always an unnamed buyer of course). This simply isn’t true. As a matter of fact, the multiples offered in the marketplace currently aren’t even close to that.
There are manifold reasons why this isn’t true. As a buyer you should educate yourself about your exposure to risk in acquiring a merchant portfolio or merchant residual and understand how to analyze these types of opportunities and incorporate your analysis into a financial model. As a seller, you need to educate yourself about the exact same thing! This will benefit you greatly by A) giving you a better idea as to how to build a more valuable book of merchant accounts, and B) positioning yourself to go to market with realistic expectations.
REAL deals involving the acquisitions of merchant portfolios and merchant residuals are happening all the time. If you’re a seller looking for liquidity, or simply cashing out, educate yourself on how valuation is determined. Don’t believe the hype…KNOW what your merchant portfolio or merchant residual is worth, and alternatively, know what they are NOT.
