What is a POS and payments provider worth?

A point-of-sale and payments business can combine three businesses. There is a hardware business that sells a terminal once, a software business that bills a subscription, and a processing business that earns a slice of every card transaction its merchants run. A buyer needs to ask which part of the earnings will still arrive next year without the owner, and who besides the owner has the power to switch that stream off, which may be the processor. What follows describes how to think about value, not a number, because no multiple can be quoted without the reseller agreement, the merchant data and the processor statements in front of the person pricing it.

The recurring stream is the asset, and hardware is not

Processing residuals and software subscriptions recur for as long as the merchant stays. A terminal sale happens once. A buyer can therefore ask how much of the profit would remain if no new terminal were installed next year. A provider whose reported earnings lean on constant new installs resembles a sales operation, which has to keep selling just to stand still. A provider whose merchants have been billed for years, with installs a small part of the picture, resembles a stream. Two businesses with identical revenue can sit far apart on exactly this point.

Revenue before and after what the processor keeps

Headline processing revenue can include amounts that pass straight through to the processor and the card networks, so the figure should be rebuilt as what the provider keeps on each merchant. That rebuilding is the recasting of earnings. It is the same exercise as normalizing any small business, with the owner’s pay and personal costs added back as add-backs, plus items specific to this sector. A one-time processor signing incentive, hardware margin from a bulk promotion and a large merchant’s temporary rebate are all items to remove or adjust, because none of them can be counted on to repeat. Matching the provider’s own reporting to the processor’s statements, merchant by merchant, is how the adjusted figure can be checked.

The processor agreement sets the ceiling

The reseller or residual agreement with the underlying processor is the contract that makes the stream the provider’s, so its remaining term and its exit terms deserve the closest reading. A long-dated agreement the processor cannot reprice gives the stream more certainty than a short one the processor can renew on its own terms. A change-of-control clause that lets the processor renegotiate the split or end the agreement when ownership changes puts the stream at risk, because the processor may be able to cut it on closing day. The processor may also have a right to reunderwrite a buyer, and a buyer the processor will not accept may not be able to complete.

Attrition and concentration

A merchant can leave because it closes, is acquired or moves to a competitor, so the pattern matters more than the average. Cohort data showing how many of the merchants boarded in each past year are still processing today lets a buyer see whether the book decays slowly or quickly and whether new installs are quietly covering a leak. Concentration works the same way. A portfolio spread across many sectors may absorb a downturn in one of them, while a portfolio heavy in a single vertical, such as restaurants, may rise and fall with that vertical.

What can separate two similar-looking providers

• How much of the stream sits under agreements the processor cannot change on a sale, compared with agreements it can.
• Whether merchant contracts renew automatically or run month to month, since the second kind is easier to lose.
• How many merchants the owner personally signed on special pricing that a successor could not hold.
• Whether software subscriptions make up a meaningful share of billings alongside processing fees, which gives the stream a second leg.
• How cleanly the provider can show its compliance evidence for the merchants it serves, a point taken up in the next section.

Compliance is a cost to check, not to assume

Two compliance questions are worth checking in this sector. The first is whether the provider’s activities bring it within federal anti-money-laundering rules. FINTRAC’s guidance treats a person or entity that provides payment services for goods or services as engaged in remitting or transmitting funds, where it receives payment instructions and acts as an intermediary between payer and payee, the payer consents to pay through it, and the payee has an agreement with it. It says that one that solely provides hardware, such as a physical payment terminal, and offers no other associated payment services is not in that category. A provider that should have registered and has not hands the buyer a problem to cost. The second is the card industry’s security standard, PCI-DSS; ask how it applies to the provider through its processor agreement and merchant contracts. Gaps across the merchant base could become remediation costs. Personal information in the merchant file must also be protected by security safeguards appropriate to its sensitivity, which is the standard PIPEDA sets.

How the price is divided on paper

In an asset sale the Canada Revenue Agency notes that the sales agreement may set a price for each asset, a value for inventory and an amount attributed to goodwill. If most of the value is contract rights and goodwill rather than equipment, the allocation deserves an accountant’s attention before an offer is signed, not after. An owner who wants an independent view of value can commission one. BDC notes that a valuation can be done at different levels of thoroughness, that a more thorough one costs more and gives more assurance, and that a valuator’s report can help an owner judge the offers that arrive.