No matter how much an ISO owner or independent agent loves the payment processing game, eventually, the time will come to exit. There are a variety of options for transitioning out of a business, and in the world of ISOs, one of the most popular and most lucrative is to sell an entire residual portfolio to another ISO or a third-party investor. Such sales may include the residuals only, or may include all of an ISO’s assets, like technology, supplies, intellectual property, or real estate. Regardless of what is included in the sale, the primary driver of valuation for the vast majority of ISOs is their residuals. 

Valuations are generally determined as a multiple of monthly residuals, and those multiples can range anywhere from three to six, all the way up to 40x or higher. In the end, the exact sale value of an ISO is determined through a delicate dance between buyer and seller, and can’t be easily pinned down at a glance. While the correct multiplier isn’t necessarily simple to calculate, it is far from arbitrary. A number of factors go into determining how many months of residuals an ISO’s portfolio is worth, including the monthly revenue itself, the number of merchants involved, attrition rate, activity levels, and more.


Monthly Revenue

The primary determinant of an ISO’s portfolio value is the amount of monthly revenue it represents. Buyers, whether they’re other ISOs or investors of any kind, generally put a larger premium on portfolios that bring in more monthly revenue, not only because of the ongoing value they represent but also because higher-value portfolios are almost always the result of years and years of work done by reputable ISOs. A portfolio measured in the tens (or even hundreds) of thousands of dollars in monthly residuals is, therefore, a far safer and more attractive investment than one measured in the low thousands of dollars a month. As a result, the multiplier a seller can expect on a portfolio generally increases alongside the total monthly residual value. For example, while a portfolio bringing in $40,000 a month in residuals may be valued at up to 30, or even 40 months of revenue, it would be difficult, if not impossible, for a portfolio generating $2,000 a month to get anywhere close to a 30x multiplier.


Residual Portfolio Size

While overall revenue is the most important factor in a valuation, where that revenue comes from matters. The number of merchants in a portfolio is important because it represents a certain level of risk to a buyer. A portfolio with strong monthly residuals spread out over hundreds of merchants is a lot safer than a portfolio with equally good earnings but only a few merchants driving them. In the first case, the new owner would need to see a mass exodus of merchants to see a significant drop in revenue – an unlikely occurrence. In the latter case, even one merchant jumping ship to a competitor could mean a devastating loss. Due to that inherent risk, portfolios with fewer merchants will generally receive less favorable valuations than larger portfolios, all else being equal. 


Attrition Rate

Attrition describes the number of accounts that drop off from an ISO’s portfolio each year, either from moving to a competing payment processor through another ISO or from ceasing to operate entirely. Attrition is an interesting metric because it describes something that happened in the past rather than the portfolio’s current state. However, attrition is still a major factor in valuation because it gives the buyer an indication of the direction in which the portfolio is trending. For instance, a portfolio bringing in $30,000 a month in residuals across a variety of merchants would seem like a strong contender for a high multiplier. But if the portfolio brought in $40,000 a month in the year prior, a buyer would rightly be alarmed by the 25% decline. That attrition may signal to the buyer that the portfolio is not stable and may continue to shrink, and that risk would almost certainly undercut the potential multiple the portfolio could command. 


Merchant Activity

How consistently merchants sell can have a big impact on sale prices, as well. When calculating valuations, merchants that sell all year round are considered “active,” and merchants that operate seasonally – like golf courses or pool installers – are often considered “inactive.” Because inactive merchants don’t contribute residuals on a consistent monthly basis all year long, they’re often excluded from the valuation altogether or at least heavily discounted. It’s also important to note that seasonal businesses that continue to operate all year but see downturns during certain seasons – like costume stores, for instance – are not considered inactive since they still generate sales year-round, albeit at varying levels. Consistency has value, and the more active an ISO’s portfolio is, the higher the multiple it’s likely to fetch when it comes time to sell. 


ISOs looking to calculate a rough portfolio value must weigh all these factors when estimating a reasonable multiple of their monthly residuals. In turn, they also need to know – to a very accurate degree – what their average monthly residuals look like. That’s far easier said than done for ISOs calculating and managing their residuals manually, but fortunately, IRIS CRM makes time-consuming manual residual calculation a thing of the past. 

IRIS CRM’s advanced residuals reporting provides automatic residuals calculations as soon as monthly reports become available from payment processors and are loaded into the system. IRIS CRM’s integrated reporting dashboard automatically combines the relevant data from all of an ISO’s payment processing partners, so current and historical residuals data across an entire portfolio can be accessed in seconds. 


To find out more about how IRIS CRM can supercharge your ISO’s residuals management and make estimating valuation faster and easier, schedule a free guided demonstration today.