Buying a POS and payments provider in Canada

When you buy a POS and payments provider, much of what you are buying may be a position in someone else’s payment chain rather than terminals or software, and the first question is how much of that position you will still hold the day after closing. Some of the answer depends on the seller’s merchants, some on the processor, and some on you: whether the processor will accept you, whether a regulator needs to know who you are, and whether the privacy duties that come with the merchant data are ones you can meet. This guide is about weighing an opportunity. The document-by-document verification that follows an accepted offer sits on the due diligence page.

Signs of a resilient merchant book, and of a fragile one

A more resilient provider may have merchants in many sectors and of many sizes, so that no downturn in one vertical and no loss of one account dents the whole. Its processor agreement may be long enough and transferable enough to survive a sale, its attrition steady and explained, its software subscriptions a source of revenue that does not rise and fall with card volume alone, and the work of onboarding and supporting merchants done by staff rather than stored in the owner’s head. A more fragile one can look identical in the headline numbers but show it in the details: one dominant vertical, pricing negotiated personally by the owner with merchants who may not stay, new installs masking churn, and a processor agreement that is short or that the processor can reprice.

What a seller may not volunteer

• Which merchants are on special pricing or rebates, and whether those arrangements end or reset when ownership changes.
• Whether any side letter or informal understanding with the processor sits outside the written agreement.
• What the provider owes to sales agents or referral partners out of the stream, and how those arrangements would be treated after a sale.
• Whether the business carries any liability back to the processor for merchant losses such as chargebacks, and how that exposure is secured.
• Any security incident, even a minor one, and how it was recorded and handled.

Ask about each one directly and get the answer in writing.

How the sales force is engaged

A provider may sell through field agents or independent sales organizations paid from the residual stream. The CRA describes an employee as someone who generally works under the direction and control of the payer under a contract of service. A self-employed worker has a contract for services, is free to choose how to carry it out and is not under the payer’s direction or control. The CRA also says workers and payers can choose how they set up their affairs, but the employment status they choose must reflect their working relationship. A buyer inheriting agents who are labelled contractors should ask whether the label matches how they really work, and should understand whether the stream owed to them travels with the business or stays with the seller.

What you must qualify for yourself

A seller cannot deliver the processor’s acceptance of you. Whether the processor will carry you as the new owner is for the processor to decide, so ask it early what it will want to see about your background and finances as well as the business’s. If the provider’s activities make it a money services business, FINTRAC’s guidance says it must register before operating in Canada, and certain persons or entities are not eligible to register, so ask counsel early whether anything in your own history raises a question. FINTRAC also says a money services business that engages agents must verify each agent’s eligibility and obtain and review criminal record checks, which becomes your administrative burden from closing day if the provider is a money services business that engages agents or mandataries. Your own qualification, not the seller’s, is one the deal may turn on.

If you are a larger payments company

Consolidators and processors buying reseller books should consider competition law as well. The Competition Bureau says the Commissioner of Competition may review any merger or acquisition regardless of size, and that whether a deal is notifiable depends on financial thresholds and other criteria, including certain exceptions, set out in the Competition Act. Where a merger was not the subject of a pre-merger notification or a request for an Advance Ruling Certificate, the Bureau says it may challenge it for up to three years after closing. Counsel can tell you whether your transaction raises the question.

What comes with the merchant data

Merchant information does not become yours without conditions. Under PIPEDA, once a transaction is completed, the parties may use and disclose personal information that was disclosed during the deal without the individual’s knowledge or consent if several conditions are met. An agreement must require each party to use the information solely for the purposes for which it was collected, permitted to be used or disclosed before the transaction was completed, to protect it with appropriate safeguards and to give effect to any withdrawal of consent. The information must be necessary to carry on the business that was the object of the transaction. One of the parties must notify the individuals, within a reasonable time after closing, that the transaction has been completed and that their information was disclosed. This does not apply where the transaction’s primary purpose or result is the purchase, sale or other acquisition or disposition, or lease, of personal information. Plan that notice before closing, not after. The choice between buying shares and buying assets may change which of these questions you face, and the comparison of an asset sale and a share sale explains the trade-off.