Is It Time to Sell?
The financial markets continue to be volatile, causing the value of many assets such as stocks and housing prices to drop. However, there are some assets that have actually increased in value as of late such as gold. Another is the value people are willing to pay for portfolios of merchants. Below I will discuss this trend and some of the factors that may be driving it.
To some extent, the value of portfolios followed the value of real estate for most of the past decade. From 2000 to 2007, portfolio values were increasing in value. A number of factors probably caused this. Loans and other types of financing was very easy to get during that time period. People were very optimistic about the returns they were getting, so the fact they had to pay a little but more for an asset every year was fine because they were certain they could sell it for more next year anyway. So by 2007 the market value for portfolios had hit its peak and my clients that sold then were very happy in hindsight.
Next the recession hit and the credit markets came to a standstill. People were unable to get any money to fund portfolio purchases and existing commitments were pulled. Also, sellers were unable to come to grips with the reduced prices they were being offered, so for about a year and a half it looked to me that that market for the sale of portfolios was at a low ebb.
However, eventually by the 2009 to 2010 time frame sellers were able to readjust their views and began to come to terms with the lower offers they were getting. The market for portfolios sales began to come back to life and I was again representing more buyers and sellers than I had been for quite a while.
The fact is though, that recently values have gotten back up to near the level they were at the height of the market in 2007. I have been continually amazed at the amount that sellers have been willing to offer in this market. And there seems to be more and more buyers in the market which obviously tends to drive up the price for portfolios. But why is this happening?
I personally have seen many new buyers entering into the industry. I am continually getting calls from people that tell me they have little or no experience in the industry but want to buy portfolios. They come from other industries like real estate sales or the mortgage industry where the opportunities have dried up. They are looking to transition their business models to something new and have identified portfolio purchases as a good way to make money.
One of the reasons new buyers tell me they are excited about the industry is because of the recurring revenue model inherent in portfolios. When the financial crisis hit, those companies that needed new sales every month to generate revenue were at risk for failure. However, companies with recurring revenue like those in the bankcard industry had a steady cash flow to allow them to weather the storm until financial conditions improved. Since the crisis and as a result of it, people now value recurring revenue streams more than ever. So now that the conditions are good to sell is it time to do so?
Some people cite the Durbin Amendment and the continued attempts at legislative involvement in our industry as a reason to sell. If the legislature continues to regulate the industry, it could result in less revenue to the people selling the portfolios. Rather than take the chance of that happening, some people are deciding to sell now to minimize that risk.
There are often personal reasons to sell. Some companies are treading water in that they have hit a point where they are only originating about as many merchants as they are losing every month. Given operating costs, paying sales people and marketing expenses, they are only able to get a small percentage of the residuals from the portfolio in their pocket each month. So, they decide why not sell the whole thing and get a big pay-day. That might be in order to fund their retirement accounts, or it might have to do with some of the more mundane reasons like divorce, death and disability.
Market conditions could also lead one to believe that now is the time to sell. Pricing compression continues to drive down profits and almost certainly will continue to do so as our industry matures. Processors and banks continue to migrate to more fee-based revenue models and often the ISOs and agents of the world do not get their usual share of those fees, further reducing the potential for income in the future. Some people believe that new technologies like mobile payments and new competitors entering the fray like Google could result in taking market share away from traditional sales channels. Again, all these things could lead some to believe that the time to sell is now.
And finally there is the price aspect. Although prices have risen back to nearly the pre-recession levels, it seems unlikely that they will continue to rise and they may not even stay at current levels very long. If you are thinking of selling now might be the right time to do so.
The decision as to whether and when to sell your portfolio is a very complex one. One should consider these issues very carefully before deciding to sell. And in any event, if you decide not to sell, then you are still the owner of a portfolio of merchants that many would love to own.
The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.
