Residual Buyouts – Don’t Make this Mistake

In the last month I’ve had the opportunity to help four different reps do their buy-outs.  There is one common mistake all of them were about to make.  This episode will help you avoid that big mistake from which I rescued them.  I’ve done quite a few buy-outs myself.  And I’ve also helped many reps.  Let me help you negotiate your residual buy-outs and recognize a good deal.

A buy-out is an opportunity to sell your residual back to the processor or to a third party who buys portfolios.  Make sure you work with a processor who allows you to own your residuals, so you have this option.  A buy-out in itself is simple.  However, there are possible conditions which complicate the negotiation.  These may be called earn-outs, hold-backs, attrition bonuses, or retention bonuses.  I want to help you understand and avoid pitfalls.  The odds of getting your money long-term are slim unless you’ve negotiated in exactly the right way.

When doing a buy-out, you’re going to get a multiple on your residual.  A common buy-out in the industry would be something like a 20X (to make the math easy.)  Let’s say your residual is $2,000 a month.  Then you do a buy-out, somebody is going to buy your $2,000 a month.  You won’t get that $2,000 a month anymore, but you are going to get a 20X.  20X means they pay you $40,000.  They make their money long-term with the $2,000 a month.  That amount will slowly decline as those accounts slowly cancel.  Thus far, the buy-out is a simple agreement.

Then the complications begin when the processor says, “Hey, we’re going to give you a 20X buy-out.  But we’ll give you 12X up front.  If your attrition is less than 10% [or some other set amount] after a year, we’ll give you another 4X.  The remaining 4X will be paid after another year if your attrition rate is _____.”  Realize nine times out of ten, those long-term agreements [called earn-outs, hold-backs, attrition bonuses, or retention bonuses] don’t pay.   The buy-out should not contain an “all or nothing” earn-out.  To agree that if you don’t meet a certain level you get nothing is a bad deal.

Here is a good deal.  20X is offered to be paid in three installments – 12X up front, another 4X in six months, and 4X after another six months.  The key issue is that you get the 4X on the current residual at that time.  Don’t agree to get the 4X “as long as your attrition is ____.”  Be sure you’re going to get paid something!  So, don’t agree to an earn-out arrangement unless it is an extremely good deal.  The processor may design the earn-out with an unrealistic attrition rate, making it unlikely for you to hit that mark.

This is a fair offer from the processor:  Pay 12X up front based on what the rate is now.  As an insurance policy, pay the other 8X over the next year based on wherever it is at that time.  That makes a lot of sense.  There is going to be some attrition.  The processor wants to pay out a little bit less.  However, an agreement of getting your 4X IF there is less than X amount of attrition is scary!

There is one other variation which will work for you.  This scenario is profitable only if you’re still selling for that processor and intend to continue with them.  They may offer to let you replace accounts to get your multiple.  You will get that 12X up front.  Then in six months you’ll get another 4X, but attrition can’t be more than 10%.    Suppose the attrition at that time is at 15%.  Then you must give the processor enough residual to replace that extra 5% before they give you the 4X.  This makes good sense.  Just be sure the attrition parameter is legitimate and makes sense.  Also, be sure you won’t be giving up all your residuals just to handle a little 4X bonus. 

Sales people frequently have the attitude, “Oh, I’ve got to have a buy-out.  I have to get this money right now!”  However, take an extra week to make sure you’re getting the right deal.  If you don’t get the right deal long-term, odds of getting your money are pretty slim.  If you’re not happy with the up-front pay out, don’t do the buy-out.

I’ll be glad to help you and answer questions.  Please comment wherever you’re seeing this episode.  Or reach out to me on Facebook, Snapchat, or Twitter.  Let me help you recognize a good deal and avoid the big mistake!

Read previous article here:  https://www.ccsalespro.com/get-past-gatekeeper-every-time/  Get Past the Gatekeeper Every Time

Read the next article here:  https://www.ccsalespro.com/front-end-processor-platform/  What is a Front-End Processor – Platform? – Merchant Services