CHICAGO — Recurring revenue and a recent spate of publicity are luring potential buyers into the acquiring industry's merger-and-acquisition market.
"There are a lot deals in the pipeline," Kevin Kidd, an attorney and partner in Nashville-based Waller, Lansden, Dortch and Davis, told attendees here Wednesday at the Midwest Acquirers Association 10th Annual Conference. "When you look at 2012, it's pretty hot."
Investors are attracted by the ongoing income they can get from acquirers, which earn residuals from credit and debit card transactions, Kidd says. The cash keeps flowing as long as the merchant-services contracts last.
Only a few other industries, such as the alarm business, offer recurring revenue, he says.
But something else also draws investors to the acquiring industry these days, Kidd says. Google, PayPal and Square are getting into the business, which generates media coverage and thus raises the public's awareness of acquiring.
As more private equity firms contemplate buying a piece of the action, more owners of independent sales organizations consider cashing out, Kidd says.
But the increase in activity has not stabilized prices, and sellers should keep their expectations realistic, Kidd advises.
"The biggest deal-killer is price," he says.
ISOs should not look at other deals and assume their business has equal value, Kidd says. ISOs without gateways and other technology sell for less than tech-laden ISOs, he says.
Before putting a business on the market, ISOs should determine their goals, which might include raising capital, exiting the business or making a strategic transaction, Kidd says. That should include a self-assessment to determine whether getting out the business really makes sense, he adds. If an ISO puts a business on the market and withdraws it without selling it, the value drops and he or she could receive less for it a few years later, Kidd warns.
ISOs that decide to sell should first try to fix problems in their businesses that could scare off potential buyers or lower the selling price, he advises.
One such problem arises with companies with a large number of small investors, Kidd says. Potential buyers fear the small investors may have the ability to hold up the sale or may not have been brought into the business in accordance with Security and Exchange Commission rules, he says.
"Some ISOs seem to have sold shares out of the back of a truck," Kidd says.
An ISO's value could also be lowered if it does not have employment agreements with executives and salespeople, since some buyers strive for continuity, Kidd says.
Another problem can occur with portability, the practice of transferring merchant contracts, Kidd notes. Even if legal agreements mention "portability," they may not include the details necessary to deliver on that promise, he says.
The Internal Revenue Service may take issue with ISOs that classify salespeople as independent contractors for tax purposes and then treat them as regular employees by providing an office or regular salary, Kidd says.
To avoid problems, ISOs can hire investment bankers to help with the sale, Kidd suggests. However, investment bankers may choose not to participate in deals worth less than $30 million, he says.
Be careful that the engagement letter obligates an investment banker to work hard for the big fee typically collected, Kidd says. ISOs should not tie themselves to an investment banker for more than 12 to 18 months because that could result in billings for future deals, he notes.