You’ve put in the hard work — signing merchants, scaling your portfolio, and nurturing a steady stream of recurring residuals. But what happens when it’s time to move on? When it’s time to cash out, too many payment professionals leave money on the table, because residuals management often takes a backseat — especially when preparing for a portfolio sale or buyout. It’s time to change that.
A portfolio buyout — when a reseller sells some or all of their merchants to another company — can be a fast track to liquidity for the seller and growth for the buyer. But the value of that buyout varies widely and depends on several key factors.
Traditionally, payment resellers couldn’t do much to maximize the value of their merchant portfolio (beyond operating as profitably as possible). But, today, that’s changed. Automated residuals reporting gives resellers deep, real-time insight into their portfolio’s performance, enabling companies to identify opportunities to optimize those portfolios, offer better due diligence to buyers, and maximize buyout values.
How and Why Portfolio Buyouts Happen
Buying out an established portfolio provides turnkey access to new revenue and growth. For a smaller independent sales organization (ISO) looking to get big or go wholesale, it’s a great way to meet revenue or resource requirements. For a company looking to expand into a highly targeted niche, buying accounts can be a more cost-effective way to access a market than trying to break in from scratch.
On the flip side, the companies and agents sell their portfolios for a variety of reasons: to exit the space, for retirement, take advantage of other opportunities or to reinvest the cash in a new payments venture. Whatever the reason maybe, the immediate payout from a sale can sometimes be more appealing than the long-term revenue a portfolio generates over time. One key factor in that decision is the buyout multiple — the amount an owner can expect to receive based on their residuals.
Residual Multiples Set the Value
In a buyout, the buyer isn’t just acquiring a short-term boost in revenue; they’re gaining long-term recurring income for as long as they can retain the merchants. They might also be gaining a strategic entry into a new vertical or region, which adds even more value. That means a portfolio is generally worth significantly more than the monthly or even annual revenue it brings in. To account for that long-term value, a residual multiple is part of every buyout calculation.
Multiples are applied to the seller’s monthly residual revenue to calculate the total buyout amount. A multiple can range anywhere from 2x or 3x for small portfolios to up to 20x for the most stable, highest value, and strategically beneficial ones. The size of the multiple a seller can negotiate has a huge impact on whether it makes more sense to sell now or to hold onto the recurring revenue for the long run.
But, whether that multiple is 3x or 20x depends on several factors.
What Determines a Portfolio’s Multiple and Sale Value?
With such a wide range of multiples possible, the natural question is: How can a buyer or seller determine a portfolio’s fair value? Ultimately, a portfolio is worth what a buyer will pay for it, but there are a dozen or more factors that go into setting a multiple. Just some of the most important ones include:
- Revenue Growth Rate
- Total monthly revenue
- Portfolio size and concentration
- Attrition rate
- Merchant activity
- Portfolio composition
- Revenue mix
- Accounting and data visibility
- Free Cash Flow
The more of these categories a portfolio scores favorably in, the more likely it is that the seller can demand multiples at the higher end of the scale or more from potential buyers.
Monthly Revenue
The total monthly residuals generated by a portfolio are one of the primary factors that goes into its sale value. First, the multiple is applied to the base monthly revenue number, so all calculations begin there. Size also impacts how attractive a portfolio is to a potential buyer; the higher the monthly residuals a portfolio generates, the safer and more stable it’s likely to be as an investment. That, in turn, demands a higher multiple.
Portfolio Size and Concentration
As mentioned earlier, the number of merchants in a portfolio is a key factor in its valuation. A portfolio with hundreds or thousands of merchants tends to be less volatile than one built around just a few large clients — even if those clients generate high residuals. Likewise, a portfolio spread across many industries is better protected than one highly concentrated in a single vertical. Buyers see revenue concentration as a risk: if a single merchant leaves, it can significantly reduce the portfolio’s value. The smaller the portfolio, the more likely it is that revenue is heavily concentrated in just a few accounts or industries.
Attrition Rate
Attrition rate is another important factor. The more merchants that drop from a portfolio in a given period, the less stable it is. High attrition rates can be a big red flag, even if revenue remains relatively stable over time. It implies a high-maintenance portfolio that requires more work than one with low attrition rates. So, the lower the attrition rate and the higher the merchant stickiness, the higher the multiple a buyer is likely to pay.
Merchant Activity
Consistent, reliable activity from merchants helps push portfolio value up. For instance, year-round sellers that generate consistent residuals are generally more valuable to a portfolio than seasonal sellers that are inactive for part, or potentially most, of the year. There are also “non-transactors” – merchants who are still paying monthly fees, but have actually silently attrited. Portfolios with consistent, active merchants are more attractive to buyers and help command a higher multiple.
Portfolio Composition
The types of merchants that make up a portfolio also impact its value. For example, a payments company might have a large portfolio of thousands of merchants, selling consistently and generating significant monthly residuals. But, if all those merchants are in high-risk verticals, industries with high regulatory scrutiny, or sell in economically unstable regions, buyers will likely offer a low multiple as a way to offset their risk.
Revenue Mix
Residuals can come from a variety of places, and not all are equally valued by buyers. Fees earned on transaction volume are high-value. One-time hardware fees and flat fees earned on services or as floors for low-volume merchants are less of a draw. Revenue generated by value-added services like fraud prevention tools, billing and advanced security tools can also positively influence a portfolio’s valuation if those services show consistent fee generation over time.
Verifiable Accounting and Data Insights
Portfolio buyers naturally do their due diligence to ensure maximum return on their investment, and opening up the books is a huge part of that. The deeper the analytics and overall proof a seller can offer in relation to things like attractive merchant lifetime value, CAC, strong same store sales, and high net and gross retention rates, the higher the multiple a portfolio is likely to command.
How Automated Residuals Maximize Value
As the saying goes, you can’t manage what you can’t measure. That’s especially true with residuals, which are complex by nature. Automated residuals management offers some significant benefits that make it faster and easier to do calculations each month. It also helps maximize the multiple and sale value for companies looking to sell all or part of their merchant book. Those benefits include:
- Improved data visibility to meet buyer due diligence requirements
- Merchant-level insights that help lower attrition rates and boost merchant health
- A more complete understanding of the weak spots that might undercut multiple size
Automated Residuals Improve Data Visibility
One of the biggest advantages of automating residuals is centralized reporting. The right tools will combine data from all of a reseller’s processing partners into a single, easy-to-use interface, making historical reports complete, accurate and instantly accessible. Then, when it’s time to sell, resellers can provide clear, reliable residuals data, building buyer trust and confidence.
Automated Residuals Improve Attrition Rate and Merchant Activity
Healthy, profitable and sticky merchants are a big part of what makes a portfolio valuable. The in-depth reporting offered by an automated residuals management system makes it easy to drill residuals data down to the merchant level. That makes it possible to keep tabs on:
- Which merchants are the most profitable and the most consistent
- Which could be doing better with some targeted assistance
- Which are trending up versus down
- Which might be more trouble than they’re worth
That insight enables companies to focus on merchant health and curate their portfolios for maximum buyout value.
Automated Residuals Identify Weaknesses That Could Limit a Portfolio’s Multiple
Ultimately, automated residuals provide more accurate, consistent and deeper insight into a company’s entire portfolio. With clear data at the portfolio, agent and merchant levels, companies can easily uncover strengths, spot weaknesses and identify opportunities that might otherwise be missed.
Whether it’s inconsistent or seasonal processing volumes, an over-dependence on high-compliance accounts, an unbalanced revenue mix, a high attrition rate or other factors, automated residuals reporting makes it easier to pinpoint issues and take the right steps to maximize buyout value.
That’s where the right technology can make all the difference.
NMI offers the industry’s most powerful automated residuals management suite. From calculations to reporting to agent payouts, it streamlines and automates the most complex and mundane aspects of residuals to save you time, money and headaches.
To find out more about how automated residuals can help you streamline your operations and boost your portfolio’s value, reach out to a member of our team today.