In the merchant acquiring space, there are many drivers of value that need to be monitored if your strategy – short term liquidity to build the business, or long-term value creation – will require a monetization event. As with any monetization event, a premium valuation is key. Though there are no silver bullets, there is a combination of KPIs that (together) are all but certain to have buyers swooning over your payments asset (business or merchant portfolio).
- High Growth – By far, the single most consequential factor in determining the value of a portfolio asset is understanding if there will be future production included in a transaction. Inherently, an asset which will continue to grow its revenues is more valuable than one whose revenues only decline post-closing. The extent to which a portfolio or business’s growth impacts its value to buyers is determined more so by the percentage rate of growth in revenues, not necessarily by the number of new accounts boarded per month. And not all accounts are created equal – one ISO’s 10-deals-a-month of high quality merchants could easily demand a greater premium to another group’s 100 SMB “aspirational”merchants.
- High Retention – High growth rates are typically not possible without at least adequate retention rates. And high retention rates make it easier to achieve high growth as a stable portfolio provides a better foundation for new accounts to increase the overall size of the business. Buyers view a high retention rate as an overall measure of efficiency, competence, and customer loyalty brought about by an ISO’s strategy and operations. It shows thoughtfulness on the part of the ISO in how they compete in the market such that merchants are not swayed to leave for competitors.
- Healthy Margins – There are many large organizations we have seen in the market which board hundreds of merchants per month with favorable attrition rates but cannot achieve the premium valuations they desire. The reason for their lack of premium multiples is due to their inability to generate meaningful profitability from their portfolios. Over-staffing, inefficient operations, large downstream splits, and high customer acquisition costs will detract from valuations. And, buyers will assume (correctly) that performance will likely decrease if cost-cutting measures are implemented. Healthy margins are critical to acquirers and investors alike.
In combination, if these three KPIs are optimized, you can all but dictate deal terms to suitable buyers. Together they empower a well run payments ISO to maximize its valuation.
