Determining ROI is not easy when looking at expanding an ISO business. If considering the incremental ROI for investing in a particular marketing or sales initiative, quite a number of factors have to be considered: overall sales plan, sale channel used, marketing, length of time for initiative, quality and qualification of leads, sales follow-up, etc. This will have to be explored as the particular initiative becomes known.
One major fact of the ISO business is there are actually two paydays. The first payday is the monthly residual check. The second payday is the larger check ISOs get when they sell part or all of their portfolio. One major objective of the ISO business is to maximize both paydays.
One thing we can look at is the relative payout for selling an ISO portfolio or business. Valuing a portfolio is a complicated task. However, we can give some general guidelines and some relative multiples for certain ISO types.
There are a number of important measures that are used to determine the value of a portfolio. We will take a look at several of these.
- Size of the portfolio – number of merchants and amount processed
- Number of new merchants approved and started processing each month during past year
- Merchant attrition by processing volume and number of merchants
- Types and size of merchants (Top 10 MCC codes, number of large volume accounts, market verticals, etc.)
- Payments implementation (integrated POS, proprietary software, specialty solutions, own gateway, etc.)
- Sales channels (agent, referral partners, inside sales group, etc.)
One major factor to consider is whether the ISO is selling a portfolio or selling the entire ISO business. Buying a static portfolio – a portfolio that does not have a sales pipeline of new customers – has inherent challenges. All portfolios attrit over time. Merchants go out of business. Merchants change processors. The issue with a static portfolio is whether the buyer will be able to hold on to enough merchants for a long enough period of time to receive more in residuals than they paid for the book of business.
If the ISO is selling its entire business, the asking price will typically be substantially higher. The ISO is selling the ISO business structure, which is largely sales, customer support and admin functions. For example, the ISO may have an agent network in place plus a couple of in-house sales persons. These sales channels, if continued and further developed, will allow the buyer to book more merchants and grow the portfolio.
The single most important determinant of multiple is the size of the portfolio.
Let’s consider two examples:
Single agent. Not a registered retail ISO, but rather an agent registered under an ISO. 200 merchants. Mix of retail, restaurant, auto repair, hair salons, etc – ie., small merchants. Multiple of monthly residual: typically somewhere in the range 20-26 time monthly residual.
Small partnership registered ISO. Two principal partners. 1,000 merchants. Mix of retail, restaurant, auto repair, hair salons, etc – ie., small merchants but also with a couple of specialized market verticals, such as medical or restaurant POS. Multiple of monthly residual: May be somewhere in the range of 34-40 times monthly residual.
Larger ISOs that are sold as a business will probably enjoy a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The range of multiples of EBITDA can vary widely, depending on the ISO.
The conclusion here is that size matters. You can build your ISO through acquisitions or organic growth, ie., new sales. Any buyer of your portfolio or ISO business will be looking for solid growth through new sales. Regardless of how you grow your ISO, keep this in mind: The bigger your book, the stronger the second payday.