The Executive Interview Series provides readers exclusive insights from movers and shakers in the payments industry. The payments industry is under continuous transformation. This series offers diverse perspectives on everything from strategy to payments technology and the industry’s future.
In this interview, TSG marketing team member Rachel Hartley sat down with Sam Wares, Director of Client Success and M&A expert at TSG, to discuss current M&A activity, what impacts multiples, and how TSG supports buyers and sellers.
Q: Rachel H.
With M&A being a hot topic as of late, what are you seeing in the market? What other trends are you seeing relative to deal activity?
A: Sam W.
It’s been widely reported that M&A deal activity is down in 2023 relative to recent years. We track deal activity in payments (fintech), where we’ve seen 30 deals in the U.S. mid-way through Q2. This is coming off a peak of 132 deals in 2021 and 114 last year.
I view this as a correction to the craze in 2021, where capital was deployed in fintech at a much faster pace – due diligence was fast-tracked, multiples were higher than ever, and buyers wanted companies in fintech that showed growth potential. Investors have plenty of capital available. Still, deal pace has slowed because multiples have returned to pre-pandemic levels, traditional due diligence processes have been re-established, and buyers are now prioritizing a path to profitability when vetting targets.
The emphasis on profitability excites me because it fits perfectly with TSG’s Value Optimization Service, which is part of our M&A services. Under the Value Optimization Service, we essentially enter a partnership with a payments company that is looking to turn the dial up on all aspects of their performance with the goal of increasing their value on their path to an exit. They do this by working closely with TSG’s experts and leveraging our one-of-a-kind suite of products. Case Study: Proven Approach to Valuation & Go-To-Market Services
When tracking deals, TSG categorizes the seller in one of four different buckets: Independent Sales Organization (ISO), Independent Software Vendor (ISV), Gateway, and Other. By nature of the type of organization and the market’s maturity, Gateway deals are the least common. If we look at the mix of deals relative to the total year-to-date compared to 2022, the portion of deals involving an acquisition of an ISV and those categorized as Other are slightly up, while acquisitions of an ISO are slightly down. This tells me that payments companies are expanding less using the traditional path of adding merchant portfolios. Now they have a greater focus on acquisitions that improve their technology, reach, or infrastructure.
Q: Rachel H.
What can you tell us about current trends with multiples?
A: Sam W.
Multiples spiked in 2021 and have come back to pre-pandemic levels. Specifically, deals are trading at around 8 to 9 times EBITDA after hitting 10.5 and greater in 2021. Another commonly used measure shows multiples ranging from 1.5 to 2 times revenue, but payments companies still see a bump trading closer to 3 to 4 times revenue. Software companies with a strong payments mechanism often see even greater multiples. The inflated multiples of 2021 are one presumed cause of the decrease in deals. Many companies received a valuation at the peak and are continuing to chase a number that is unavailable today.
Of course, those numbers are averages and when we’re talking about multiples it’s always a case-by-case scenario. Many factors need to be considered, including merchant portfolio makeup (size, risk, age, price, profitability, attrition), sales distribution model and channels, vertical focus, geography, and synergies with the buyer. One new twist that is impacting valuations of merchant portfolios is surcharging. The recent regulatory changes enacted by Visa (reduction of the maximum surcharge allowed amount on credit transactions from 4% to 3%) instantly cut margins for portfolios with a significant portion of surcharging and therefore reduced valuations.
Buyers are looking at future profitability when evaluating an asset. So from their perspective, the impact is likely more than the 100-basis point reduction because they have to assume that further reductions on surcharge limits are coming. Surcharging may help a merchant services provider in the short term. Companies should consider how techniques like surcharging impacts their exit strategy.
Q: Rachel H.
In your opinion, where is M&A headed in the second half of 2023?
A: Sam W.
With the increase in the cost of capital, we’ve seen an uptick in deal structures aimed at easing the pain of lower valuations. Buyers are sweetening the terms for sellers by including performance-based earnout payments that will be due at a later date. Deals with earnouts often increase in less-than-ideal market conditions. I expect that to continue until a major shift in the debt market exists.
I doubt that deal activity pace will accelerate enough to catch up to the number of deals completed last year. However, I do expect an uptick as we close out the year. Based on my personal conversations, I know there is plenty of interest among buyers. Also, that capital is ready to be deployed. It may simply be a matter of both sides as a collective coming to grips with today’s landscape in M&A.
Q: Rachel H.
How does TSG aid in M&A?
A: Sam W.
Our M&A services are truly comprehensive. Overall, we provide strategic guidance and expertise to businesses involved in the payments industry, or those who are hoping to enter payments, seeking to navigate mergers, acquisitions, and partnerships. This includes both buy-side and sell-side engagements, valuation and due diligence, and transaction support.
The type of buy-side engagement I recommend is what we call an engaged search. This is a proactive approach instead of our referral engagement, which I’ll unsurprisingly define as more passive or reactive. For the engaged search, our clients leverage TSG assets across the organization. We build a list of targets that fit their criteria for acquisition or investment. Then we contact each target with the goal of facilitating an introductory conversation. I like to think of it as an informed matchmaking exercise.
Our sell-side services cover the gambit as well, from go-to-market strategy and guidance on valuation, positioning, and other factors that will aid in maximizing value during the sales process. Sell-side services often include valuations, but they can also be provided on a standalone basis as part of a request for assistance with due diligence. In that scenario, TSG analyzes the portfolio by reviewing financial data, market trends, competitive landscape, and other relevant factors to assess the risks and opportunities associated with a prospective asset.
One final note is software companies, or ISVs, have played a major role in payments over the last several years. That trend is not going to stop. In fact, approximately half of the companies who seek guidance from our consulting team are software companies. As a result, our M&A services cover more than just ISOs, with many clients seeking to expand through the acquisition of or partnership with an ISV. Related: Ease of Entry for Software Companies
Q: Rachel H.
Tell us about your background and how it has influenced your current role at TSG
A: Sam W.
I’ve worked in several industries throughout my career, including healthcare, banking, mortgages, insurance, and class action settlement recovery. One common theme across all, whether in a B2C or B2B role, was the need to build and maintain relationships.
Before I joined TSG, I worked for a firm called MCAG who specializes in recovering money for businesses from class action settlements. Due to the nature of the industry, creating awareness around the service was best achieved through strategic relationships with vendors with clients who stood to gain significant returns from the variety of available class action settlements. Key aspects of my role focused on identifying strategic partners. Then educating them about the benefits of offering MCAG’s services to their corporate customers. Finally, working with these partners to execute an effective referral program.
I joined the TSG Client Success team in 2022, where I manage relationships with existing clients, facilitate sales, and manage our M&A business. It’s a constant balancing act to ensure that clients get value from their existing subscriptions while staying in tune with their needs to best support their go-forward plans. The role is fast-paced, challenging, and I absolutely love it.
Q: Rachel H.
How did you get started in the payments industry, more specifically the M&A side of payments?
A: Sam W.
One of the settlements MCAG covered concerned interchange fees for merchants who accepted Visa or Mastercard payments. Naturally, we set out to find strategic partners who could refer clients that could benefit from the settlement.
As we began contacting payments companies, a contact fortuitously noted that TSG was the best source if we wanted introductions to leaders in the acquiring space. We connected with Kurt Strawhecker, Mike Strawhecker, and TSG, and almost immediately, as we were pitching the partnership opportunity to the vast majority of the top 50 acquirers, the recommendation paid off. Within months, I forged new relationships with dozens of acquirers, which officially activated my interest in the payments industry.
As anyone in the payments industry knows, there has been much M&A activity in payments over the last ten years. The referral programs I ran with payments companies required me to stay in tune with everything happening in M&A. One day I was working with Company A while pursuing a partnership with Company B. Next, only to see the two join forces the following week. It became fascinating to see how these companies evolved over the years. I loved knowing the intricacies of who the parts were before and after a merger or acquisition.
Q: Rachel H.
Do you have any closing thoughts or comments?
A: Sam W.
I’ll use this as an opportunity to recruit owners thinking about selling or knowing they need to consider anything related to if/how/when they’ll exit. These folks should contact TSG. There is rarely a shortage of payments companies looking to expand through M&A. We talk with them every day. The right match could already be in our queue and one quick call or message could activate your opportunity.
Related: M&A: Overcoming Challenges and Embracing Opportunities