Article
To sell or not to sell?
An ISO primer on mergers and acquisitions.
June 24, 2013
by Daryl Cornell
Should the coming EMV upgrade requirement materialize, U.S. ISOs face a stark choice. Despite the lack of a U.S. regulatory body charged with mandating conversion to EMV, the heavy financial risk which will be assumed post-liability shift has the potential to sink many ISO businesses.
As we've seen in Canada, security breach claims originating at non-EMV ATMs can easily reach six figures. Alternatively, many processors, when faced with EMV risk from shallow-pocketed ISOs unable to absorb potential fraud losses, may simply elect to turn off "at-risk" terminals. We also saw this happen in Canada during the recent EMV upgrade process.
EMV conversion is essentially an ante to stay in the U.S. ISO game — the upgrade or replacement of your entire fleet. The alternative for U.S. ISOs is to sell their business.
The good news is that there is currently an active market in the U.S. for ISO businesses. However, given the high cost of EMV upgrades or a potential wave of sellers as we approach 2016, demand and pricing will likely recede. For all U.S. ISOs, the time to carefully weigh selling versus upgrading for EMV is now.
ISO buyers are savvy and have generally been through the merger and acquisition process many times, putting the virgin ISO seller at a tremendous disadvantage. Hiring a professional to help guide you through the process is strongly recommended, but can be expensive, especially for a smaller ISO with fewer than 1,000 contracts.
The advantage of engaging professional help is the experience in running company sale processes, including the development of sale material, identification of the target buyer pool and ultimately negotiation of the sale contract, which is much more than just price!
Regardless of who guides the process, preparation is the key. Before embarking on a sale process, be sure that the following are in place:
- audited financials;
- clean contracts;
- detailed records; and
- realistic expectations.
The last point may be the most important as it is rare that a seller realizes what they believe their business to be worth. ISO valuations are typically in the range of four to six times EBITDA — possibly higher if the buyer has a strategic interest in the deal.
The seller now must face a dizzying array of activities including but not limited to:
- data room preparation;
- "teaser" preparation and distribution;
- confidentiality agreements;
- term sheet;
- deal book;
- management presentations;
- due diligence and site visits;
- expressions of interest;
- exclusivity agreements; and
- purchase contract negotiation.
These are all time-consuming activities for your management team, which detract from running the business!
Be aware that once you embark on a sale process, you will quickly be exposed and in damage control with customers, vendors and employees who, in this closely interconnected ATM industry, will all quickly figure out what's happening.
The most common buyer strategy is to throw out an aggressive purchase price, setting the stage for the classic "crab-walk" backward following due diligence. The buyer is banking on the fact that the seller has already "mentally cashed the check," making financial commitments which preclude a strategy of walking away.
There is also an emotional investment involved in a sale process. After a lengthy due diligence process, the buyer may believe that the prospect of having to restart the process is enough to extract heavy concessions from the seller.
If all of this sounds complicated and time consuming, it is. Selling a business is not for the faint of heart or for amateurs. If you decide to take the plunge, line up your team, your documentation, your steely nerves and your realistic expectations and all the best!
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cover photo: steven snodgrass
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