Residual buyouts are programs in which ISOs or payment processors offer to purchase the residuals portfolios of the companies or agents that work under them. Buyout programs provide processors or ISOs with a fast, efficient way to bolster their own residual portfolios, enabling rapid growth without the need to go out and recruit any new business. 

The benefit to the buying organization is clear, but why would an agent or ISO sell their hard-earned residuals and give up years and years of future income?

 

Why Might an Agent or ISO Sell a Residual Portfolio?

A residuals portfolio is made up of thousands of tiny payments that build up — and payout — over time. Seasoned agents can have portfolios well into the five figures monthly, and ISOs can easily bring in six or even seven figures each month after years and years of operations. Having a consistent monthly income for life (or, more accurately, the lifespan of the merchants involved) is worth a lot, but sometimes an immediate payment is a more attractive option. The time value of money certainly comes into play, as does the risk of attrition over time, but one of the biggest reasons portfolio-holders choose to sell is an attractive multiplier. 

 

Residual Buyout Multipliers

Residuals buyers understand that they’re trying to buy a lifetime of income, and as a result, they often sweeten the deal by offering significant multipliers. A multiplier takes the value of a portfolio, or a fraction of the value, and multiplies it by a number, ranging from a few times to 40x or potentially even more. For instance, a portfolio worth $5,000/month would bring the seller $100,000 at a 20x multiplier. The higher the multiplier, the more likely it is portfolio-holders will be motivated to sell. As a result, the companies looking to fuel the most aggressive growth offer the largest multipliers. But even companies content to grow the old-fashioned way will often offer their agents and sub-ISOs multipliers on their residuals — albeit more conservative ones — should a portfolio owner wish to exit. 

 

How Attrition Impacts Buyouts

Not all portfolios are created equal, and buying one out — especially at a high multiplier — represents a real risk for the buyer. For instance, if an agent’s portfolio is unstable, a buyer might pay a premium to purchase it only to see most of the merchants leave shortly after and the residuals run dry — a major loss. 

To protect against losses from attrition, buyers will look at factors beyond pure monthly value, like the average tenure of the merchants in the portfolio, the types of industries they operate in, and more. For instance, a portfolio full of relatively young businesses might demand a lower multiplier or warrant a pass altogether. Another way buyers protect themselves against attrition is to spread payments out over time. A buyer might offer a 20x multiplier but only pay out 10x upfront, with the remaining 10x paid over a number of years to spread out the risk. 

 

Creating the Conditions for a High-Value Buyout

ISOs and agents looking to build strong, stable portfolios that will demand a high multiplier upon buyout need to recruit the highest quality merchants, create strong relationships with them, and ensure the best possible ongoing service to minimize attrition. 

One of the best ways to create an environment that attracts the best merchants and keeps them sticking around for the long run is to adopt a customer resource management platform. A good payments CRM, like IRIS CRM, offers ISOs and agents a wide array of tools designed specifically to meet the unique challenges of sales and service in the payments industry. From prospecting and recruiting, to ongoing service and support, to reporting and residuals management, software like IRIS CRM automates and streamlines all aspects of ISO operations, ensuring larger merchant rosters and more valuable portfolios. 

 

To see everything a top payments CRM can do for your ISO in action, schedule a free guided demonstration of IRIS CRM today.