Selling Your Merchant Processing Residual: First Right of Refusal
For many merchant level salespeople, selling your merchant processing residual can be an eye-opening experience. You had always heard of it being done, and in most cases, that the transaction itself was relatively simple. For the most part, this is true, at least comparatively speaking as opposed to selling a merchant processing portfolio, or enterprise level payments processing company or payment’s technology company. That being said, there are still many issues that need to be addressed in this type of transaction, and one of the most basic is the nature of the first right of refusal you agreed to in your agent agreement with the merchant processing ISO you write your business with. (Note: this is something you need to be absolutely clear on as its one of the answers to the “First Four” questions I always encourage my buy-side consulting clients to ask.)
Every merchant level salesperson, or MLS, has to sign an agreement with their respective ISO which outlines the business terms of their relationship. In almost every case, one of those business terms addresses the ISO’s rights in the event you decide you wish to sell your residual stream. Basically, it sets out a process by which you MUST comply with in order to effectuate a sale of your residual stream. (Note to both buyers and sellers: there is almost ALWAYS language in your agreement which entitles your ISO to a first right of refusal. So don’t think it’s unusual!)
What should be important to you, the MLS, is to understand the TYPE of first right of refusal you have in your agreement. Why is this important? Because:
A) potential buyers of your residual may not wish to engage with you if the first right of refusal carries with it too many caveats, or excessively prohibitive terms, and
B) if it does, you want to go back to your ISO and re-negotiate those terms.
I’ll give you a few examples:
Type 1: First Offer: This type of first right of refusal is fairly common. It basically says that if you wish to sell your residual, you need to notify your ISO and allow them to make a first offer on it. If you don’t accept their offer, then and only then can you shop it to outside parties for acquisition.
Type 2: Offer & Match: This type of first right of refusal is also fairly common. It basically says that if you wish to sell your residual, you are allowed to shop it to outside parties provided you bring them a bona fide offer first. If your ISO matches this offer, then they reserve the right to buy your residual back from you, if they don’t match the offer, then they waive their right to purchase your residual and you are free to shop it at will.
Type 3: Offer & Match w/ Time Contingency: This type of first right of refusal is similar to Type 2, but it gives your ISO the right to take a certain amount of time to make a decision on whether or not they’re going to buy back or waive on purchasing your residual. As you can imagine, if the time frame is 90 days, that’s going to turn off a lot of buyers and they’ll quickly move on to the next deal.
Type 4: Absolute First Right Of Refusal: As a general proposition, if this is the type of first right of refusal you have, that’s not good. Basically, this gives the ISO free will to say yes you can sell your residual, or no you can’t, without any triggers i.e. offers having been first made by your ISO (Type 1), or them having to match and or waive on any bona fide offers you had already solicited (Type 2).
You can see from the examples above that the nature of the first right of refusal you have is very important when it comes to selling your residual stream. I can tell you first hand that the more experienced buyers in the marketplace won’t even bite on your deal if they’re uncomfortable with the type of first right of refusal you have. So be mindful of the language which addresses this issue in your agreement with your ISO and if you think it may be problematic, try to re-negotiate it to more favorable terms for yourself.