Portfolio Sales Tips
The middle of 2008 was the height of the market for sales of merchant portfolios. There were lots of buyers with ready cash around and the valuations were the highest I had ever seen. But that all changed when the financial crisis hit. The buyers all but disappeared and for over a year essentially the market came to a halt. But, in the last six months the market has been showing signs of a revival. Buyers are back, valuations have risen and sellers have reset their expectations to a reasonable level. I thought then it would be a good time to talk with some of my clients and get some tips for both buyers and sellers about the portfolio purchase process.
Know Your Buyer:
Making sure your buyer is a reputable, financially sound company is an important first step for any seller. Justin Milmeister, the owner of Elite Merchant Solutions, found that out the hard way. He had decided to sell his portfolio in early 2008, had found a buyer and was ready to sign the final purchase document. “We were in the hotel one Thursday signing the purchase agreement and were told the funds would be there on the following Tuesday.” For many months after that meeting Milmeister was told that the money was coming but “the money never came,” he said.
He eventually found another buyer but he had wasted months of his time and tens of thousands of dollars on attorneys, travel and other expenses with the first buyer. The first buyer “had wine tastes and a beer budget. We should have asked for a bank reference or for them to show us the cash in the bank to know that the funds were available. It was a pipe dream. They did not have the money.” The next buyer Milmeister learned worked with a nationally know investment bank which gave him the confidence that the deal would go through, which it eventually did.
What did he learn from this experience. Milmeister offered that “you are selling your life’s work and need to make sure not just the company but the people you are working with are a good fit and that they are honorable people. You need to be careful in that you are providing them with information about who your merchants are and they can go call on your merchants if the deal does not go through. You may not want to provide the buyer with your merchants’ names and other important information until the very end.”
What Do Buyers Look For?
I next got more of the buyer’s perspective from Darrin Ginsberg, the owner of a company that buys and sells portfolios and also provides loans secured by residual streams. Ginsberg has been involved as a seller and buyer in more than 50 sales and offered the following tips to sellers seeking to maximize the value of their portfolios: (i) don’t have lots of similar types of merchants (same SIC code) or chain type stores in the portfolio; (ii) it is usually better to a have lower profit margin, as merchants tend to stay longer; (iii) sell your accounts shortly after signing them up so that the merchant agreement still has a long period to expiration; and (iv) don’t have a few large merchants that make up an inordinate percentage of the overall profits of the portfolio.
I also asked him to tell me about what sellers do that can make him potentially walk away from a deal. He said it was failing to provide full disclosure. “I expect that each deal will have some ‘hair’ on it. There is never the perfect deal” Ginsberg said. “But, I don’t want them to conceal information from me. The due diligence process is bound to expose those issues.”
The Seller’s Perspective:
Some deals include an up front payment and then other payments later that are usually tied to the performance of the portfolio. From the seller’s side, Milmeister has dealt with this issue and advised “get as much as you can up front. The average earn-out is over one year and you never know what could happen to the buyer. They could go insolvent in a year. The earn-out is the icing on the cake but don’t count on it.”
It is also critical to review the purchase agreement. Milmeister states that you “need to know all the items in the agreement especially the earn-out. Use examples in the purchase agreement about how to calculate the earn-out so there is no gray area. The earn-out is important and if it is not mapped out clearly there will be a problem. Depending on how much the earn-out is the buyer may use any loophole to get out of paying. And it could be too expensive to litigate to get the earn-out payments if the deal is not big enough.”
Another tip he had was to “use a bankcard attorney. This is a very specific industry and it speeds up the process and you don’t have to teach the attorney our business. Mistakes can be made if you do not understand the terminology of the industry. Chances are if you use a bankcard attorney he or she has already worked with the players in the transaction and they know each other. That makes things easier and smoother and saves you a lot of money.”
Additional Thoughts:
Finally, given that the market is still not that strong, people have been looking at different ways to get value out of their portfolios. Ginsberg has observed that “many people have been turning to loans instead of selling over the past year or two. If you are going to sell you might be better off getting a loan.” His reasoning was that you may have to make loan payments over a number of years but in the end, you still own your portfolio instead of having to give it to someone else.
The market for portfolios is coming back and you might decide that now is the right time to sell your portfolio. By keeping these tips in mind you can hopefully build a more valuable portfolio and also handle the sales process like a pro.
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.
