Building a credit card processing business is rewarding for many reasons. One of the top reasons is the ability to sell your merchant services residual portfolio. Just today I spoke to a sales professional who already has an exit strategy and made me realize that many merchant services sales people don’t really understand this side of the business. In today’s post, my goal is to help you understand how you can use your portfolio as a source of capital to grow your business. Take a moment to download our free 91 page guide! You will learn how to build and sell a merchant residual portfolio.
In order for you to one day put up your sign “Credit Card Processing Business for Sale,” you need to make sure you have your ducks in a row before you begin building your merchant services portfolio. Here are a few things to consider before you start selling to ensure that you can leverage your portfolio in order to grow your business.
#1 – Make sure you own your residuals. This seems obvious. But I never cease to be disappointed and amazed by the number of industry sales people with whom I speak who lost their residuals after building their portfolio, simply because they didn’t understand the agent agreement.
Here is one question you should always ask before signing an agent agreement: “If I build up a portfolio of over $1,000 per month, get into a car accident or choose another career path and stop selling, will I still get my residuals?”
#2 – Make sure you can sell your residuals. Some processors have a stipulation that you cannot sell your residuals or that you can only sell the residuals back to them. This is obviously a supply and demand issue. To sign a “First Right of Refusal” agreement is acceptable. This means your processor has the right to match any outside offer you get. But make sure you are able to sell your portfolio to anyone you choose. Take a moment to download our free 91 page guide! You will learn how to build and sell a merchant residual portfolio.
#3 – Ask about borrowing against your portfolio. One way you can tell you are with a middle man or small ISO is if they cannot lend you any money. This should be a red flag. Most established companies can lend you money, so you don’t have to put your credit card processing business up for sale. At times to do a “buyout” makes sense. But if you can borrow against your residuals, it will probably make better long term financial sense.
Once you know you own your residuals, you are free to sell them, and your processor / ISO (Independent Sales Organization) has deep enough pockets to loan you some money, you are ready to use the portfolio pump to grow your business!
Here are some general guidelines that will help you understand what will happen when you hang your sign in the window that reads “Credit Card Processing Business for Sale.”
Qualification: Before you can do anything with your portfolio, you will need to have at least twenty merchant accounts and $1,000 per month or more in residuals. No processor or ISO is going to be interested in buying a portfolio smaller than this; the risks are simply too high.
Buyout – For an all up front buyout, meaning you get all of the money up front to sell your portfolio, you will usually get between twelve and twenty times your monthly residuals. This figure also depends on the attrition rate and the size of the portfolio. So if you have a $1,000 per month residual, expect to get $12,000 to $20,000 when you sell the residual portfolio up front. Take a moment to download our free 91 page guide! You will learn how to build and sell a merchant residual portfolio.
Earn-Out – This is similar to a buyout. The difference is that you get a multiple up front, and then you continue earning as long as your portfolio value doesn’t fall below a certain point. Usually you will get a total of twenty to twenty-eight times your monthly residuals. But you will only get twelve to fifteen times up front. The remaining amount will be paid over a period of twelve to thirty-six months, depending on the performance of the portfolio.
Buyout with Security – If you have a large portfolio and are only looking to sell a portion of it, you can get a larger multiple of twenty-two to twenty-eight times your monthly residuals. This can be done by guaranteeing for a certain period of time if your portfolio has a certain amount of attrition, you will replace the cancelled accounts.
Residual Loans – If your plan is to borrow against your residuals, you will normally be able to borrow five to twelve times your monthly residuals. There are a lot of different types of residual loans with interest rates and terms that are all over the place. The lender will be looking for security. So the best way to make a good deal is to provide lots of growth to your processor and borrow the money directly from them. They will be most likely to loan you money if they know you are using the funds to grow your business.
I have worked with several different lenders over the years. If you use an outside lender, expect to pay higher interest rates. But you can still get a good term of twelve to twenty-four months to pay back the loan. If you work through your processor, you will usually be able to get longer terms of twenty-four to thirty-six months with a better interest rate. Take a moment to download our free 91 page guide! You will learn how to build and sell a merchant residual portfolio.
I hope this article has helped you to better understand what to expect when you sell your merchant services portfolio. If you have a portfolio of over $1,000 per month and are looking for a way to leverage it, shoot me an email. I will introduce you to the right person.
James Shepherd
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