By Adam T. Hark, Co-Founder, Preston Todd Advisors
Payments processors and service providers aren’t the only ones benefiting from rising valuations in today’s massive convergence of technology, banking, and payments. Though the payments industry has successfully leveraged synergistic value from the acquisitions of, and/or strategic partnerships with ISVs and VARs, there has been a similar effect evidenced on the other side of the equation as well.
ISV and VAR owner/operators who have successfully integrated payments into their respective platforms have also borne witness to rising valuations. Though I stand by my assertion in my first article that the payments industry needs the ISV and VAR community for viability and not the other way around, this convergence of payments and software has been the proverbial rising tide to lift all boats.
What’s driving ISV and VAR valuations higher is a surge in demand from payments companies, most of which from acquirers and processors. The need for PSPs and transaction processors to adopt and sell value added products and services to their respective client bases has them hot on the trail of high quality business management solution and integrated POS technologies.
Further, because payments companies have historically benefitted from a strong interest from the investment community due to their recurring revenue model, they’re bringing their private equity, institutional, and venture capital partners along for the ride as well. The product of this market dynamic is that the sheer number of buyers for ISV and VAR platforms has exploded. Compound this explosion of buyers with a sea of historically cheap capital, and the ISV and VAR community is benefitting from a perfect storm of exogenous economic factors driving their valuations higher.
Now, if you read my previous article you will recall that I asserted the drivers lifting ISV and VAR valuations were somewhat nuanced. Given the macroeconomic, external forces stated above, my prior assertion may seem a bit counterintuitive. How could valuations not go higher? Well, here’s the catch ... contracts.
For ISVs and VARs with payments integration, the terms and conditions of their contractual relationship with their payments service providers can be the difference between a high valuation and low valuation, and in some cases, may be the determining factor as to why there’s no valuation — where buyers have no interest at all. Thus, it’s critical to fully understand the strategic interest of these payments industry buyers in making these acquisitions.
As I’ve stated before, the payments industry is looking to the software community, via VARs, and ISVs for value added products and services. This of course is the explicit strategy. But what about the implicit strategy? What do these value added products and services actually do for these companies?
The short answer is that they increase margins, fuel growth, and enhance client retention. They also present an opportunity for the acquiring payments company to grab the existing payments processing business. But all of these value propositions to payments companies only hold true if the ISV or VAR being acquired has exclusive ownership of the business relationship with their client. If an ISV or VAR does not own the client relationship, or shares the ownership of the client relationship with another payments service provider, there’s a high probability that the ISV or VAR has effectively devalued their enterprise.
ISVs and VARs need to understand that if they enter into service agreements with payment service providers that entitle the provider to full or part ownership of the client relationship, they may very well have made themselves — their companies — anathema to that very same pool of buyers who are currently driving up ISV and VAR valuations. ISVs and VARs should always seek to implement and maintain as strong a contractual relationship as possible with their clients. This is an essential component of value creation.
Adam T. Hark is Co-Founder of Preston Todd Advisors. With over a decade of experience in payments, payments technology, and FinTech, Adam advises clients in M&A, growth strategy, exits, and business and portfolio valuations. Adam T. Hark can be reached at firstname.lastname@example.org or 617-340-8779.