Whether you’re ready to sell or you’re just curious about your portfolio’s worth, a valuation can provide the information you seek. It’s essential. Well-managed merchant portfolios can generate significant income. However, like any asset, their actual value is about much more than what hits your bank account.

Understanding how buyers assess your portfolio can help you command a higher sale price, negotiate agreements in your favor, and avoid inevitable unpleasant surprises down the road.

In this post, you’ll find out:

• How to download our merchant portfolio valuation checklist
• Vital portfolio performance metrics to track
• A handy checklist summary

Download Your Merchant Portfolio Valuation Checklist

From understanding regulatory compliance to payment processing fees, we’ve compiled everything below into a convenient downloadable format. Keep this checklist handy, whether by printing out paper copies or editing and sharing it digitally.

A Closer Look at Our Merchant Portfolio Valuation Checklist

As a company that has purchased hundreds of merchant portfolios, Velocity Funding doesn’t only look at monthly revenue. When working with a serious buyer, expect them to look into the following factors.

Portfolio Performance Metrics: It All Starts With Numbers

Understandably, most valuations begin by looking at the size of a monthly residual stream. However, positive earnings every month (while good) aren’t typically enough. It’s also crucial that what you earn as an agent or ISO remains stable or grows over the long term.

Other vital portfolio performance metrics include:

• Growth Trends: Momentum matters. Are earnings flat, rising, or declining?
• Active vs. Inactive Accounts: Don’t neglect the importance of attrition. Address the dead weight dragging down your portfolio’s worth.
• Average Lifetime Value (LTV): A strong LTV is an indicator of reliable, long-term income.

Merchant Mix Analysis: Who Are You Serving?

Tracking our previously mentioned portfolio performance metrics gets things off to a great start. It’s also essential to investigate the composition of your merchant accounts, otherwise known as performing a merchant mix analysis. Having a diversified blend of accounts can offer protection against volatility while boosting your portfolio’s long-term stability.

As you delve into this aspect of a merchant portfolio valuation checklist, consider the following:

• Verticals: Restaurants? Retail? Something with more risk? Having too many merchants concentrated in one vertical can reduce the value of your portfolio.
• Processing Volume: Do one or a few merchant accounts for a sizable percentage of your residuals? A buyer might view your portfolio as riskier than others.
• Payment Methods: Are you leaning on ecommerce payments or ones completed in person? Having a more equal ratio can suggest a healthier and more diverse merchant base.

Customer Acquisition Costs: Is Your Growth Cost-Efficient?

Taking on new merchants can be good. Things become even better when they earn healthy residuals. However, are you acquiring new accounts profitably? A merchant portfolio valuation checklist can help.

While exact formulas can differ, a popular option compares customer acquisition costs (CAC) with a merchant’s lifetime value (LTV). A good CAC-to-LTV ratio is at or below 1:4. In other words, you spent 25% or less of a merchant’s lifetime value to acquire it.

You may also need to disclose:

• If you offer upfront incentives or bonuses
• Your acquisition methods
• Retention rates

Having this supplemental information can show you’re growing without burning through a lot of cash. When that’s apparent, your portfolio can appear valuable to many potential buyers.

Churn Rate: How Well You Retain Merchants

Almost nothing can hinder impressive portfolio performance metrics faster than high churn. Think of your portfolio as a bucket and the merchants in it as water. Churn is like a hole in this bucket, causing water to learn (merchants to leave).

It’s helpful to consider voluntary vs. involuntary churn when creating a merchant portfolio valuation checklist. The former happens when companies actively cancel their accounts with their agents or ISOs. Involuntary churn occurs when chargebacks or fraud are initiated.

Do you need a 0% churn rate? Thankfully, no. However, be prepared to explain portfolio-related churn, especially if it has recently started rising or is otherwise unstable.

Regulatory Compliance: Is Your Portfolio “Clean?”

Having solid residuals kicks things off to a great start. However, don’t get too excited. Unfortunately, compliance gaps can derail a deal in an instant. While you may have reasonable explanations for regulatory compliance violations, the average buyer looks at compliance issues as messy portfolios.

Buyers want to ensure you’re PCI-DSS compliant, follow know-your-customer (KYC) protocols, and have a clean audit history. 

Contract Terms: Watching Out for Hidden Surprises

A sometimes neglected but critical aspect of a merchant portfolio valuation checklist involves terms. It affects portfolio transferability. You may have excellent margins and numbers, but if your residuals are about to fall victim to clawbacks or your contract is non-transferable, your valuation can drop instantly.

To help prevent any problems related to contract terms, review these items carefully:

• Residual split terms with your processor
• Exclusivity clauses or auto-renewals
• Whether or not you own the residuals

Payment Processing Fees: Are You Leaving Money on the Table?

Your merchant portfolio valuation checklist may not reveal any issues yet, but if your margins are razor-thin, your portfolio might be underperforming. Look at your average margin per account. Unfortunately, many portfolios lose value due to their fee structures, which benefit processors more than agents or ISOs.

Efficient payment processing fees and strong margin management make a portfolio more appealing to buyers. However, don’t wait until you’re preparing to sell to discover where any revenue leaks are occurring.

Customer Service Quality: Are You Being Treated Well?

Treating customers well isn’t only something merchants worry about. These merchants are your customers, meaning it’s essential to ensure they have a good experience working with you. When that happens, merchants tend to stick around longer as they bolster the strength of your portfolio.

Key indicators of excellent customer service quality include:

• Fast response times
• High resolution rates
• Escalation rates

Merchant Portfolio Valuation Checklist Summary: What to Remember

• Portfolio Performance Metrics
  • Stable monthly residuals
  • Strong average merchant LTV
• Merchant Mix Analysis
  • A diverse mix of merchants
  • Blend of in-person and online payments
• Customer Acquisition Costs
  • Remember the 1:4 CAC-to-LTV ratio
• Churn Rate
  • Monthly churn under 3%
• Regulatory Compliance
  • DCI-PSS compliance
  • Clean history
• Clear Contract Terms
• Fair Payment Processing Fees
• Exceptional Customer Service Quality

Keep Your Portfolio Healthy

Velocity Funding has over 25 years of experience and has purchased hundreds of portfolios. It’s our impressive experience that went into creating our merchant portfolio valuation checklist. We issue an offer to purchase approximately 95% of the portfolios we valuate. Additionally, we move quickly and deliver high-quality customer service. If you’re thinking about selling or just want to know where you stand, let’s talk.

Get Your FREE Portfolio Valuation