What Am I Worth?
There are many reasons that you may want to know what your portfolio of merchants is worth. Some people are just curious about what that value is and others have specific reasons that they need to know what it is worth. Below I will describe the process of getting your portfolio valued and detail a number of reasons that you might want to do so.
The first thing to do is to choose a professional who you want to give you a valuation opinion. . There are a number of companies and individuals that perform this type of service in the bankcard industry. It is important though to use an appraiser familiar with the bankcard world given that portfolios are valued based upon sales prices in the industry. I have seen many appraisals done by non-industry valuation experts that severely undervalued portfolios because these “experts” did not know what metrics were used when portfolios are bought and sold in our industry.
This brings up the issue of what is being valued and the valuation methodology. There are many ways to value a business. One method is the expected discounted cash flow method where the future cash flows of the business are discounted to present value to determine a value. Another way is to look at public companies’ stock value and use that benchmark to extrapolate a value for a company. But that only works for very large companies.
What I am talking about is valuing the typical agent or ISO portfolio that could be a few thousand dollars of monthly residuals up to a few hundred thousand dollars per month of residuals. For the most part, these portfolios sell on the open market for a value that is a multiple of the average monthly residuals that are paid to the agent or ISO. To me, this is the most accurate value one can place on these portfolios. The value is the amount a reasonable buyer would pay for the portfolio to a willing seller in the open market.
So what the valuation is doing is really giving a range as to the expected value that the portfolio would sell on the open market. This “arm’s length transaction” type of valuation is generally the one that is most favored by the courts and others that need to rely on a valuation of a portfolio.
To that end, you can expect the person valuing the portfolio to request from you many of the same things that a typical potential buyer would want to see. This includes, the monthly residual reports for the portfolio and the agreement(s) under which the residuals are paid.
The expert will be doing a couple things when he/she reviews these documents: The first is deriving an average monthly residual amount to use in the valuation. The next thing is to determine the appropriate multiple of the monthly residual to use to actually ascertain a value, which is usually expressed as a range, rather than one specific number. The other things the expert will be doing is looking for any risk factors in the portfolio that could impact the multiple that would be appropriate to use in valuing the portfolio.
The end result of all this work is typically an expert report on the value of the business. The expert will provide the client with a written explanation of the value of the portfolio, expressed as a range not a specific number, and an explanation as to how the portfolio value was determined. Now you know what your portfolio is worth but why would you need to know that other than for the sake of curiosity?
One of the reasons I have been asked to do valuation reports is for tax planning purposes. People want to know how much their business is worth so that they can determine how to pass it on to their heirs with a minimum amount of taxes due on the transfer. Most of my clients get over 95% of their revenue from the monthly residuals they receive generated from their merchant accounts. So if you know the value of the residuals derived from the merchant accounts for a portfolio of merchants, in essence you know the value of the business. Once you know the value of the business, you can design ways to try to reduce any potential tax bill when bequeathing it to your heirs.
That same value can be used by multiple owners of an agent or ISO to plan how to address the situation if one the owners passes away or become disabled. Many of my clients have 2 main owners of the business that each own 50% of the company. If one of them is unable to help run the business, the other owner is faced with having to work with and operate the business with the other owner’s family or heirs, which most of my clients don’t want to happen. So, in their corporate documents they provide for one owner to be able to buy-out the other owner should the owner become disabled or die.
In order to fund such a buyout, it is important to know the value of the asset. Valuing the company gives the owners the necessary information they need to prepare for such an eventuality should it become necessary. That usually takes the form of getting some sort of life insurance on the owners that is used to fund the buyout. By getting a proper valuation the owners are able to get the right amount of insurance to fund an orderly buy out.
One of the most common reasons I am asked to provide valuation reports and to act as an expert witness in this area is in divorce cases. In a divorce case, one of the most contentious areas revolves around money and how much the marital asserts are worth. To that end, valuation reports and testimony can be critical to determine who gets what in the divorce. I have seen traditional appraisers use other methods to value an ISO or agent portfolio that severely under or over value the true value of what the portfolio could fetch on the open market. To that end, getting an appraisal based on methods typically used in the bankcard industry can be a game changer in such a case.
Another time to get a valuation of your portfolio is when you are going to sell your portfolio on the open market. By doing so, you will have a better idea of what you can expect to be paid at the end of the sale process. If you get some sort of lowball offer, you will be in a position to counter with a more reasonable amount. Getting a valuation before you sell can make sure that you get all you can in a sale and that you don’t get shortchanged.
And finally, another use for such valuations is in the context of litigation, most typically when agents are being sued for moving merchants. In legal cases, the law generally holds that to prove damages the plaintiff must prove in a non-speculative manner the value of what it has lost. To that end, if a sales agent has moved a number of merchants to another processor in violation of a non-solicitation provision, the plaintiff needs to prove the value of those merchants. And what better way to do so than to show what the plaintiff could have sold those merchants for out on the open market.
Be it just for the sake of curiosity, or due the fact you are in a contentious lawsuit, there are many reasons to find out exactly what your company is worth. But make sure that you use someone who has experience in our industry. And also don’t be afraid to ask about their qualifications, the number of times they have done valuations and whether or not they have qualified as an expert witness in court. By hiring someone with the right credentials you can ensure you engage an appraiser who can accurately value your business.
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.