The Value of Words: How Contract Terms Affect Portfolio Valuation

When negotiating a merchant-portfolio acquisition, buyers and sellers may want to examine more than the usual terms and conditions for elements that could affect the value, and potential, of the portfolio, advises an analyst.

While there are obvious terms to look for, such as those directly related to ownership of the merchant account, other, tangential, ones can have an impact on the portfolio valuation, says Scott Calliham, an analyst at Annapolis, Md.-based First Annapolis Consulting, who recently published a report on contract terms.

In his report, Calliham says specific ownership language can affect the value of a portfolio. A sponsor bank may be a party to a merchant agreement, and that could create ambiguity about ownership. The agreement between the sponsor bank and the independent sales organization should spell out which entity controls—in effect, owns—the merchant agreement.

Another key issue is portability: Can the merchant portfolio be moved to another entity? That right needs to be specified, and, ideally, the agreement should give the ISO or acquirer the right to initiate the assignment of the actual merchant contracts, Calliham notes in the report. “For example, if there is no right to transfer the merchant agreements to another processor, then there may not be any synergies with a conversion and the buyer may not be able to take advantage of a lower in-house processing cost compared to where the merchants are currently being processed,” he says in an email to Digital Transactions News.

Another critical term is right of first refusal. This gives an entity the right to review a proposed deal and potentially match the offer. “On the surface, this appears to be a reasonable term,” Calliham says, “as the ISO or acquirer is typically interested in maximizing value, regardless of the entity purchasing the assets.” But knowing another party can come in and match the deal causes many potential buyers to hesitate. “This can have the effect of the seller not being able to go to market fully and get multiple bids from multiple parties to increase competition and the value given to the seller,” he says.

Other terms to be on the lookout for are any that dictate a short amount of time to convert the portfolio, non-solicit and non-compete clauses, and whether the bank identification numbers for the merchant accounts can be assigned to another sponsor bank.

“These are all terms that ISOs/acquirers should think about when negotiating a processing arrangement with another party–the absence or presence of these terms will have an impact on a potential sale transaction–either potentially reducing the value the seller could get otherwise, or potentially making the sale processing more complex (e.g., potentially having a conflict with the processor in interpretation of the language, harder for a conversion to take place, etc.),” Calliham says.

It’s rare, too, that a merchant portfolio won’t have some tradeoffs, he says. “There are always tradeoffs in negotiations and the ISO/acquirer may be OK with some of these terms as it could be a means to an end (e.g., lower per transaction pricing, etc.) with the processor. This is not to say that these terms are ‘deal-killers’ in that an ISO/acquirer will not be able to sell its portfolio/business, although these terms will impact a sales process to some degree.”