Merchant Portfolio Valuation: It’s not just about the multiple!
A common misstep of would be merchant portfolio sellers is that when presented with the question “how much money are you looking to realize from the sale of your portfolio?”, they’re quick to respond with some form of refrain which references the phrase ‘monthly residual’ and the word ‘multiple’. Interestingly enough, it often eludes these sellers that in fact they haven’t actually answered the question that was asked them.
It is commonly accepted as true that the methodology applied to valuing a merchant processing portfolio is an assignment of a multiplier to the portfolio’s net monthly processing revenue (or residual). However, the multiplier in of itself is meaningless until the net monthly processing revenue number is known. These 2 components are inextricably linked and only when taken together, do they answer the question of what’s to be realized (monetarily) from the sale of the merchant portfolio asset.
As such, sellers should take care to focus just as much on the multiple they’re looking to receive as the baseline revenue number that the multiplier is applied to. Depending on the internal attributes of any merchant processing portfolio, the baseline monthly revenue number can vary materially, and thus substantially affect the portfolio asset’s valuation.
All sellers ought to periodically assess the quality of the revenue being generated by the individual merchants in their portfolios. For example, a lot of buyers will back out any and all revenue derived from non-processing merchants; merchants who aren’t doing any transactions but are generating revenue by way of monthly minimum fees. Other types of revenue buyers may not ‘count’ towards the baseline revenue number are PCI compliance and PCI NON-compliance fees. Bottom line, if you’re selling your merchant portfolio, don’t just assume that every single dollar generated by your merchant portfolio will be counted towards the monthly residual that the buyer is going to assign the multiple to.
This interplay between the multiplier and the baseline monthly revenue stream is critical to the deal making process. If you’re a seller and your engagement with a buyer is predicated on being given a certain multiple, you’re missing the big picture and could prematurely and unnecessarily stop a potential deal in its tracks. Sellers too often enter the deal process with a preconception of a certain multiple being the defining factor in whether or not a deal can be done. It’s not. The actual dollar amount being offered is, and that’s a function of both the multiple and the monthly residual stream.
I recommend that all sellers enter the deal process by determining what they’re looking to realize in total dollars for the sale of their portfolio first. Let the buyer work the numbers backwards from there. When sellers go ‘guns a blazing’ into conversations with potential buyers about needing to realize a certain multiple, they put themselves at risk of scaring buyers away from the deal who may be otherwise capable of, and willing to, put together a financial package which addresses seller’s actual capital needs. Solely approaching the deal in terms of the multiple is tactically unwise, and can hinder an otherwise well thought out strategic vision involving the sale of your merchant portfolio.