The Strawhecker Group (TSG) recently completed an assessment of M&A transactions in the merchant acquiring market completed over the past two decades including merchant portfolio and ISO enterprise transactions that generated $1.5 to $10 billion in annual volume. TSG has concluded that transactions of this size have averaged a multiple of 2.64 times annual net revenue.

According to TSG there are numerous value drivers behind transactions which impact acquisition valuations. Multiples lying well below the mean, in the bottom 25^th percentile, for example, typically are static portfolios with a limited or non-existent distribution channel, above average attrition, or no merchant account portability. Conversely, transactions with multiples lying well above the mean carry various tangible and intangible assets creating an array of strategic value and synergies to an acquiring entity.

Click here for TSG’s bell curve illustration

Characteristics of transactions in the upper percentiles often include assets such as a proprietary technology and wide spread distribution channels, two of the keys to success in the acquiring sector of the payments industry. Strong sales forces, niche market penetration, and operational scale also accompany above average transaction multiples. These attributes can significantly increase the strategic value to a buyer.

TSG found that, based on a rolling three year average, portfolios and enterprises generating up to $10 billion in annual sales volume have attracted an average net revenue multiple of 3.09 times over the last three years, 16% below a 2008 high of 3.68 times.  Numerous outside factors such as stubbornly high unemployment, sluggish same store sales growth, uncertainty surrounding the economic recovery, and newly implemented legislation have all contributed to increased risk aversion among investors.  These outside factors have had adverse consequences inside the payments industry including above average merchant attrition, lower ticket sizes, and a shift towards lower cost debit transactions. TSG sees these indicators as the most prominent reasons behind the recent decrease in net revenue multiples.

Throughout the recession, however, the acquiring sector of the payments industry has generated much attention from investors in both the public and private equity markets. This can be viewed as a positive as availability of capital is another key to success in the acquiring industry.

Although the average multiple trend is telling, TSG’s research displays that it is dangerous to value a business based on a multiple. Buyers typically value these transactions based on future cash flow expectations and other characteristics as described above. In TSG’s opinion market multiples are merely a perspective to compare and contrast and monitor general trends, not a method to maximize value on either side of the transaction.