Understanding Purchase Agreement Intricracies is Essential When Selling Credit Card Processing Residual Income Streams

This guide will help you understand and navigate the complexities of residual stream purchase agreements.

Selling your residuals isn’t just about immediate payment; it’s about securing long-term portfolio value for earnouts, ensuring a smooth transition for your merchants, and protecting your reputation.

Key Components

A residual purchase agreement outlines the terms and conditions under which a buyer is willing to acquire your credit card processing residual income stream. A comprehensive agreement should ensure that you are fairly compensated and that the sale aligns with your long-term goals.

The three most important factors to consider when negotiating the sale of residuals, include:

TOTAL PURCHASE PRICE

The Total Purchase Price is the agreed-upon amount for the entire portfolio of residuals. Total Purchase Price is typically broken into two components, the upfront Closing Amount and contingent, back-end Earnout Payments.

Why It Matters

The Closing Amount is the immediate fixed payment received upon the completion of the transaction. Additional variable Earnout Payments are contingent on future portfolio performance, such as merchant retention rate or portfolio revenue generated, post-sale. Both Closing Amount and Earnout Payments make up the Total Purchase Price. Understanding these terms is crucial to your overall shortand long-term financial planning.

Quick Tips

• Understand Payout Dates – Make sure the contract clearly specifies when you will receive various payments after transaction closing.
• Clarify Earnout Structure – Ensure earnout payments are clearly defined with realistic milestones, timelines and conditions.
• Understand Payout Structure – Be comfortable with the timing and size of both the Closing Amount and future Earnout Payments. An agreement with a heavy back-loaded structure may leave you with insufficient compensation upfront to meet current needs.

EARNOUT REQUIREMENTS

Additional Earnout Payments are contingent on specific post-sale conditions, such as merchant retentionor a certain level of new business generation. These payments typically extend over a period of time after the transaction closing, such as 12 to 36 months.

Why It Matters

Earnouts are common because they protect the buyer in case merchants don’t stay with the processor or produce as expected. However, if earnout conditions aren’t clear, you risk receiving less than the full value of your portfolio.

Quick Tips

• Set Clear Retention and Performance Goals – Negotiate specific retention and performance goals that are reasonable and achievable given your portfolio’s history and market conditions.
• Secure a Reasonable Earnout Period – Aim for an earnout period that is not excessively long. Generally, 12 to 36 months is standard.
• Tie Payments to Actual Performance – Earnouts should be based on clear, measurable factors like merchant retention, total transaction or charge volume, or other performance metrics.

FUTURE PRODUCTION REQUIREMENTS

Future production requirements specify the portfolio growth required during a certain time period once the acquisition has closed. Ongoing production requirements typically demand continual introduction of new merchants into the portfolio through merchant account sales, especially if a portion of the purchase price is contingent upon such performance and can sometimes involve ongoing merchant support.

Why It Matters

You need to know whether you must continue generating sales for the buyer post-sale (dynamic sale) or if the portfolio will be considered static, requiring no further effort. Production requirements impact both earnout terms and overall deal value.

Quick Tips

• Clarify Future Production Obligations – If the sale includes future production requirements, ensure these expectations are clear, realistic and fair based on current sales capacity.
• Define Post-Sale Roles – If you are required to continue sales efforts or support the portfolio, outline a clear role and compensation structure. This will ensure you are not overburdened post-sale.
• Negotiate a Clear Transition Period – If there’s an expectation for future merchant onboarding or support, negotiate a clear and reasonable transition period during which you will be able to manage the portfolio to achieve the agreed-upon performance.

Other Considerations

While purchase price, earnout payments and future production requirements are the primary components of a residual purchase agreement, several additional factors can have an impact on the overall value of the sale and post-sale experience. Here are two more important considerations:

MERCHANT EXPERIENCE

The fate of your merchants post-acquisition is one of the most important aspects of any sale. You should understand how the transition will be managed, including whether merchants will remain with the same processor, how contracts will be handled and whether merchants will be notified of the change.

Why It Matters

A smooth transition is critical to ensuring merchants stay with the new buyer and continue generating residual income. If merchants are dissatisfied with the transition, they may choose to leave, reducing or eliminating potential for your earnout payments.

Quick Tips

• Ensure Proper Merchant Communication – Negotiate so the buyer provides clear communication to all merchants in the portfolio, ensuring they understand the transition process and the benefits of staying with the purchaser.
• Clarify Retention Strategies – Make sure there is a plan in place to retain merchants and ensure continued business. This may include customer service agreements or financial incentives.

BUYER REPUTATION

The reputation of the company purchasing your portfolio is crucial. If the buyer is frequently involved in lawsuits, has poor standing in the industry or has a history of mishandling merchant relationships, it can negatively impact residual income and the value of your sale.

Why It Matters

Selling to a reputable company ensures your merchants are taken care of properly post-acquisition. It also protects your professional reputation. Selling to a tarnished brand can lead to merchant attrition, disputes or a decline in earnout payments.

Quick Tip

• Research the Buyer Thoroughly – Investigate the buyer’s reputation. Look at online reviews, assess overall standing in the market and check with agents who have worked with the company previously.

Conclusion

Selling your residuals is a significant decision, both financially and professionally. By carefully considering the total purchase price, earnout requirements, future production obligations and other factors such as merchant experience and buyer reputation, you can protect both the immediate and long-term value of residual buyout compensation.

Whether you’re looking for a quick payout or gradual transition, the key to a successful sale is finding a reputable buyer with clear, fair terms that align with your goals. Remember to prioritize not only financial compensation but the legacy of your merchant relationships and your professional reputation.

By taking these steps, you can ensure a smooth, profitable exit from merchant services or utilize the funds to take your business and/or personal life to the next level.

About Cutter

For decades, Cutter has provided quality funding through portfolio purchases. Our view is that quality servicing is non-negotiable, and that post-sale merchant attrition is the result of a portfolio left unmanaged. That’s why we typically provide full servicing for the portfolios we purchase.

Cutter’s team of expert payments professionals knows how to deliver effective merchant support in tandem with ISOs. Merchant servicing takes time but is necessary to stem attrition to maximize portfolio value on an ongoing basis.