PEP Episode 052 — Prepare Your Business or Book for Sale | The Art of Selling Your Payments Portfolio or Biz

Introduction

Transcript

Anthony Malatesta (00:00):

Opened it, your higher dates and what they’re all getting paid and what you’re paying them and benefits. And someone’s like, oh man, it’s going to take me two weeks. And I was like, okay, well if you were trying to sell your business right now, that’d be a problem.

Christopher Dryden (00:12):

Or even talking to ’em about downline agents.

Anthony Malatesta (00:14):

Yeah,

Christopher Dryden (00:15):

What the economics are.

Anthony Malatesta (00:17):

Know, knowing where all those contracts are and

Christopher Dryden (00:19):

Totally the

Anthony Malatesta (00:20):

Terms of all those contracts are right. Getting my clients prepared from an organizational level of you need to know where all your important documents are, what the terms of all of them are. You need to understand, here’s how I get all my reporting, here’s how I review my reporting. Here’s how I do my financials in a consistent and meaningful way where if we sell your business and you have to go into accounting diligence and the accounting is not done properly, you could be looking at a massive writedown of your transaction value. Isn’t that something you’re going to want to know far before you sign an LOI to sell your business at a price you think is good? But now two weeks later, three weeks later, after we get through diligence, it’s going to come down by 30% because we didn’t take care of something you easily could have taken care of prior to that.

Jeremy Stock (01:04):

Welcome to the Payments Experts podcast, a podcast of global legal law firm. We hope you enjoy this episode. We’re really excited we got an in-studio podcast today. Joining us is Anthony Malta from all the way from Boston with Wesley Hills Financial Group and Chris Dryden who’s always with us. Chris, the founding and managing partner of global legal law firm. Gentlemen. Gentlemen, we’re looking forward to a great conversation today. Welcome to the podcast, Anthony.

Christopher Dryden (01:37):

Thanks for having me. Alright, so we’re here. Anthony’s in the house, we’ve been trying to get him here for a while. He is the pride of Nahant Massachusetts right outside of Boston. Anthony’s a longtime friend. He actually sits in a parallel universe to our client base that we do, which is really important. When we were talking about actually getting into this particular conversation and kind of where you want to focus and because I think what Anthony does is equally important to what we do in the space, which is really become an advisor for how people are going to enter operate and then exit the space. And so it’s a business advisor capacity known Anthony since he actually fell into the space about a decade ago or so.

Anthony Malatesta (02:29):

You’re the first person I met at my first regional.

Christopher Dryden (02:31):

Yeah. So it’s funny how you meet people in the industry. I always watch this with industry participants where you go to the shows and everybody knows one another, but then they change employment but they still not really knows. So it’s cool because we’re kind of part of that group these days. We just sort of sit on the fringes a little bit. But Anthony’s a principal in Wellesley Hills Financial. So first I guess probably the more interesting thing would be is how did you fall into payments? I ask everybody. I fell into payments. You do it.

Anthony Malatesta (03:04):

So my job right now is a continuation of an unpaid internship. I got my sophomore year of college, I went to a school outside of Boston called Bentley University School. It’s a great school for accounting and finance and if you want to do accounting and finance, they had a whole bunch of opportunities within a lot of the big corporate partners that they had at school where there’s a lot of opportunity there. And they gave you a really good foundational training of basics of accounting and finance. And I got an internship my sophomore year with a small firm that was doing m and a advisory and they were helping Heartland Payments do a bunch of roll-ups for K 12 companies that were doing integrated payments. That was like 2012. So we were super early integrated payments strategy and I started helping them out with doing research and I was like, I think there’s opportunity here. And I never would’ve guessed it and I stuck with it. I started working part-time throughout college, and then once I started after school I was like, you know what? This is it. And basically it’s been its direct line from there to here.

Christopher Dryden (04:14):

And the funny thing is when I met Anthony, he was as equally lost in the industry as a whole going to a show and trying to figure out where do I fit into this place because being on the fringe and being on the periphery, what we do, it supplements, but it’s not like a direct operational flow.

Anthony Malatesta (04:36):

No, totally. And that’s maybe to this day, I think maybe the biggest blind spot for what I do. Not in the trenches every day signing up merchant accounts, but I think that benefits us. It allows us just to have a different perspective than the clients that we operate. I work on the side of things where the capital markets intersect with this industry, and that’s kind of what fuels business valuations. And that’s kind of the tide that’s been really pushing a lot of the transactional activity in the space. And you don’t get to understand that if you’re heads down in merchant accounts. So I think that’s the perspective that I can share. And I’ve had enough experience with these businesses where I know a lot of the workflows, I know a lot of the pain points of the business owners in the space and I can really help them and empathize with them there, but then show them this other perspective that they’re not getting.

Christopher Dryden (05:28):

Yeah, I mean that was the interesting part is that we have the luxury of actually having a single client when we started, and so we did everything for ’em. So we had to know their, I mean I’ve learned through just owning a business, you break it down into three, it’s marketing, fulfillment and servicing. I mean every business, it can be more dynamic than that, but it’s really,

Anthony Malatesta (05:51):

No, it doesn’t.

Christopher Dryden (05:52):

Doesn’t matter. That kind of fits it. So we actually got an up close and personal view of the sales process. We had to know it to defend it. It was pretty aggressive called the smash and grab. And back then it was really different because it wasn’t as strategic when you went out to sale. But even to today, it always amazes me that there’s so many people that we service, especially on the contract side that want me to go through the schedule and give feedback or red line on a schedule. And I was like, no, we usually reserve that for you guys doing this is a

Anthony Malatesta (06:31):

Business conversation. Yeah, yeah, totally. This is a legal thing.

Christopher Dryden (06:34):

I don’t even talk to the business people generally.

Anthony Malatesta (06:36):

No, totally. And that’s something we see too. Luckily we’ve got enough contacts in our space and we see enough of these things where we can give our 2 cents and not lawyers, we don’t give legal advice, but at least we can say, Hey, I’ve read enough of these contracts where I know what the general terms are and can help out. So I kind of get the same thing from the other direction.

Christopher Dryden (06:56):

Yeah, that’s the funny thing. You guys spend your time in the contracts, the way that we spend our times in the residual reports, right? I mean it’s like a little on the converse of one another, but I learned that one of the benefits of having just regular conversations with Anthony, sometimes we work on transactions together. Most of the time we don’t. But the nice part is that the knowledge base that he has supplements what I’m doing a lot of times and really gives new perspective to when we were talking coming on, it was like what we do people find value in. A lot of times it takes a little while for people that are especially fledgling business to find value in legal, but then it’s like your doctor or you want to find value in the relationships that are important. But I think more and more I look at your relationships you have with clients, same clients, and it’s equally important. You have to really think it through.

Anthony Malatesta (07:56):

I like to think so. I think my long-term clients would agree with you on that. I think one of the things that I definitely want to help people understand about my business and what we do is that it’s not just transactional. I kind of had this ethos when we founded Wellesley Hills five years ago where I wanted the couldn’t find a way, it was a mouthful, it didn’t fit in the marketing slogans, but I was like, I want to find a way to do relationship driven transactions, not have transactional relationships.

Anthony Malatesta (08:28):

And I think a lot of people think of our business as an investment bank people just to kind of give the broad strokes. So we haven’t really hit that yet in the conversation that people don’t really understand what we do or an investment bank that focuses on FinTech payments B2B software. So anything related to capital markets transactions, whether you’re trying to take on a loan, find a new equity investor, sell your assets, whether that’s a portfolio or a piece of technology, or eventually exit your business. We run those transactions where we do a both whole host of support services, whether that is valuation work analysis, work on portfolios, a whole bunch of analytics I’d like to just get into in the conversation, help drive home the point of what we provide business owners with the knowledge base of. But I think people just call me up and be like, do you have any portfolios for sale? And I’m like, yeah, I do. I’m happy to help you with that. And we can have that conversation. I think a lot of times the business owners don’t, or the people who are approaching me don’t understand, okay, is whatever you have going to help my business or hurt my business if I buy it? Because sold a lot of portfolios where I don’t think it really helped the buyer at the end of the day, but if they wanted to buy it, I help ’em buy it for sure. And

Christopher Dryden (09:38):

Well, it’s funny you say that because one of the things that we see a lot of times are sour relationships and lawyer’s. One of those things that you would want if you have business partners to figure out what the rights and duties are, what’s the corporate entity you want? What’s the structure? And you force the client to maybe look the things a little bit further out than just, Hey, we’re going to start this business. But with you it’s the same thing. Because if you were to actually start to talk to them, I mean some of the people that I see that are looking for financing, it’s to buy out their partner and they’re like, they want to get away from a bad relationship. No,

Anthony Malatesta (10:16):

Plenty of that. Plenty of that. Exactly. And I think the one thing that I would like to do more work of, because I think it’s what we do best, and I think it’s where we really provide the best long-term value for our clients, is helping them build a plan for their business. And the earlier in the life cycle, the better. To me it’s kind of an intentionality thing. It’s like, what is your intention with this business? What are you trying to build? And I think everybody more or less is looking at some point to have a good exit. It’s hard to figure out where and how that occurs, but I think everybody has a goal in mind of what dollar amount that is or whether that’s the security in life, it gets them after or opening them up to level up to go be with the next partner, take some chips off the table and then do it again, do it bigger. But I don’t think a lot of business owners actively plan for that and operate their business with that intention in mind. I think especially in the ISO space, it’s just sales driven business. Most of the operators are heads down putting out whatever fire it is that day or just trying to get the next five, 10 deals a month through the door. They’re not actively thinking about how that next decision is impacting their long-term business.

Christopher Dryden (11:35):

Totally.

Anthony Malatesta (11:36):

And also too, not spending on whether that’s time or dollars on building up the internal review processes and analysis that they need to understand of how their business is actually performing now. You can’t get to an exit, whatever your goal number is without knowing what it’s going to take to get there. Do you have the growth that you need? Do you have the profitability? Do you need, do you have the KPIs and underlying the business that you need to be able to achieve that?

Christopher Dryden (12:05):

Do you know what they’re now? I think the more important thing is is that a lot of people that are starting a business, they think exit, but they don’t have any of the building blocks to exit. It is sort of like, Hey, I want to start this business. I want to protect myself. I want to do this and that. And you start talking to about corporate entities and they’re a little bit lost and it’s really, I mean you can make it less complex. I mean you can really break it down and provide it in a digestible format where you can teach and give them things that they’re not even thinking about on their own. Which I think for, because I find a lot of value in looking at, okay, what does my exit look like from the financial side? I think that’s way more important than what we do. But without having the experience in doing what I do, I wouldn’t know all the things that you just rattled off. I mean, these are things that I think you kind of stumble into when you are a business owner and you don’t have a plan and you’re just thinking about, Hey, I could make some money, but maybe not on the very front end, but I would think by the making, by the time you want to start paying payroll tax, might one of these thinking some of these things.

Anthony Malatesta (13:21):

Absolutely. And what are you building at the end of the day? I had a meeting with my business partners yesterday and the topic came up for us of what our road looks like and how long we want to do it and where our exit opportunities might be for our business. And I’d be hypocritical if I wasn’t practicing what I preach here that I’m trying to help other clients with. I need to take that approach to my own business of what the end game is and where I’m at and all that. And thankfully I’m young enough and got a long career in front of me where it’s not too big of a question right now. It’s a ways off. So the immediate focus for us is building and helping more clients, but it’s a serious conversation that I think everybody has to really look at their choices and how they’re operating.

Anthony Malatesta (14:09):

And to me, I think the best way to help business owners visualize that is through the analytics we provide and going through the business and understanding, okay, what does your portfolio look like? What does your sales channel look like? What’s your attrition look like? What does your profitability look like and how does that all play into your value today? And that’s an undertaking that is simpler for me in my team just because we’ve built a business around it and been doing it for years. The funny thing is though, what business owners discover just through going through the exercise with me is manyfold, not just from the answers we give them, but here’s a really easy one. Pulling the data that I need to provide you the insights is a lot more difficult for some business owners than it’s for others.

Christopher Dryden (14:59):

Yeah, for sure. I mean, depending on what your level of

Anthony Malatesta (15:02):

Organization

Christopher Dryden (15:03):

Is, service provider is totally

Anthony Malatesta (15:05):

No, but even just your level of organization within your own record keeping, your own accounting books.

Christopher Dryden (15:09):

Well, it’s funny you say that. So we do a lot of regulatory defense work and a lot of times it’s just responding to subpoenas and you have to, I mean they’re looking for business records usually for one of your merchants, but you get into a record keeping and retention destruction slash conversation of what that looks like, what you’re required to keep, because depending on your sophistication, but I find that valuable and I want to come back to that. But the thing that I struggle with because you were talking about having your own exit, it’s interesting because Jeremy Itest this, I call us in this firm like a group of refugees,

Christopher Dryden (15:49):

And I think part of my mission in owning this business is to give people a place where they can thrive by just being themselves. And when I’ve thought about exit recently, I’ve thought about what does that mean for everybody? Because it does enter my mind of I run a business, but I employ a lot of people and hopefully provide them a really good place to come and spend their time and work towards something. But when you’re talking about exiting, you just rattled off all the financial parameters. Then I think about it because what we sell is labor. And so I think about it from the employee context too, and kind like corporate culture, corporate structure, what that looks like.

Anthony Malatesta (16:35):

No, a thousand percent. And we’re the same way. I mean, we are a five-year-old investment bank and a lot of the other firms in our space are decades and decades or over a hundred years old. The culture is very different and I share the

Christopher Dryden (16:51):

Less nimble.

Anthony Malatesta (16:52):

Totally.

Christopher Dryden (16:53):

Right,

Anthony Malatesta (16:53):

And I share your value of giving opportunities for people to come and earn a living and make a life for themselves. I mean, I think that’s getting harder and harder out here these days. Where do you see that you find the most value for your clients and what you’re doing? I would say ultimately I think what we do best is representing them for whatever their capital markets needs are. So sell side processes for selling a business, selling an asset portfolio, selling or setting them up with credit facilities or equity investors, finding the right partners at the right terms. We’ve got a huge network that we’ve been able to work through over the years, so we know which groups in the industry, depending on what a particular business looks like from their own factors, who’s going to value that the aggressively, who’s really going to see more value in that than the rest of the market to get them the best outcome for their exit?

Anthony Malatesta (17:57):

Now that’s the center of the bullseye in terms of working with a group. And that’s the culmination of a long time of building a business. Usually where we can find value before that event is in helping companies be the best prepared for that event. Because that event a lot of times is not of our clients’ choosing. They get approached by somebody and it seems like a good opportunity, so they want to explore it. And a lot of times when that happens to them, I say, okay, well, we can certainly help you get a deal done with them, but there’s no way of knowing that that’s the best outcome unless we open the

Christopher Dryden (18:33):

Process. Well, I was going to say, that’s the great time to look under the hood and figure out where are you missing opportunity.

Anthony Malatesta (18:40):

But it’s good time to test the market when somebody approaches you and you’re thinking about it because then you have the benefit of having multiple bidders for your asset and really running a competitive process that maximizes your transaction value. But we want to make sure our clients are prepared for that time if it comes before they think they’re ready. I mean, we were talking earlier, I said it’s really enlightening for business owners if I’m just asking them on their initial evaluation like, Hey, I just need a list of all your employees, your hire dates, and what they’re all getting paid and what you’re paying them in benefits. And someone’s like, oh man, it’s going to take me two weeks. And I was like, okay, well if you were trying to sell your business right now, that’d be a problem.

Christopher Dryden (19:24):

Or even talking to ’em about downline agents, what the economics

Anthony Malatesta (19:30):

Are telling those, knowing where all those contracts are and

Christopher Dryden (19:32):

Totally the

Anthony Malatesta (19:32):

Terms of all those contracts are getting my clients prepared from an organizational level of you need to know where all your important documents are, what the terms of all of them are. You need to understand, here’s how I get all my reporting. Here’s how I review my reporting. Here’s how I do my financials in a consistent and meaningful way where if we sell your business and you have to go into accounting diligence and the accounting’s not done properly, you could be looking at a massive writedown of your transaction value. Isn’t that something you’re going to want to know far before you sign an L LOI to sell your business at a price you think is good, but now two weeks later, three weeks later, after we get through diligence, it’s going to come down by 30% because we didn’t take care of something you easily could have taken care of prior to that

Christopher Dryden (20:16):

Or even take care of opportunities. When I was talking about downline agents, I mean, a lot of times there’s opportunity there to actually have a liquidation event with them a thousand percent or allow ’em to tag along and do a simultaneous close and let them benefit. And especially if you’re going to do on a go forward.

Anthony Malatesta (20:35):

And that’s something we can do too in terms of we’ve set up a lot of debt facilities for companies to help them raise money to help buy out their downline agents, to increase their cashflow so that when it comes time for them to exit, they’re in a more profitable position. And we can help them structure those deals in a way where they’re going to get more production out of those agents than they did before. We can help set up the incentives properly there. So there’s a ton to do. And really what drives all of that is analysis work. You cannot put your finger in the wind and get a good sense of what your attrition is really, right. Every ISO owner I’ve talked to thinks they have the lowest attrition in the world.

Christopher Dryden (21:16):

Well, what does it mean? It was funny. I was doing a transaction and it was kind of a hybrid. I’m working on it right now, and part of it’s like card payment residuals, the other part’s, ATM M, which is a totally different animal and totally different valuation. And they actually had to spin out a portion of it, physical ATMs, and then there’s contracts refill and all that. But there was a term in there of merchant attrition, and we rewrote the clause for some sort of not minimal performance, not a guarantee, but an earnout benchmark of if there’s a reduction in revenue beyond this. But the first term that was used was merchant attrition, and it was like, well, that’s a nebulous term, right?

Anthony Malatesta (22:06):

Yeah, totally. Does that mean accounts leaving? Does that mean dollars of revenue loss? Is that dollars of volume lost? Right. And those are the first layer of metrics. I mean, the next layer is if we look at just the accounts that leave, okay, well, was this account even processing any transactions or did this account ever turn on for processing? If you remove those, does your attrition look better or worse? Usually better.

Christopher Dryden (22:29):

But

Anthony Malatesta (22:30):

Then your revenue goes down per account. Yeah, probably not substantially. Not substantially, but that that’s another effect of how much revenue are you generating from those accounts, and is it more than 10, 15% of your overall revenue? If so, that’s probably a problem, right? It probably just shows that either you’re milking a lot of money from merchants that aren’t processing and

Christopher Dryden (22:50):

They’re not even aware probably.

Anthony Malatesta (22:52):

Correct. And that could be a problem down the line, or you just have a lot of underperforming accounts that you’re never getting turned on. You’ve got a lot of agents that are submitting deals that they’re not activating. I don’t know how certain ISOs are set up in terms of is it the home office that does the activations? Is the agent responsible for the activations and making sure a merchant gets live? If it’s the agent, you might think an agent’s killing it in terms of the number of deals he’s submitting, but he might not be getting those accounts activated a good enough rate. So we look at a portfolio and we will break it down, not just on the first level, but on the second and third of, we had a group that hired us to look at all of their sales teams.

Anthony Malatesta (23:31):

What does each sales team’s track record compared to the others in terms of performance, whether it’s on attrition, number of deals submitted, average volume per deal submitted, looking at those metrics of understanding, okay, a higher volume per month merchant is a more valuable merchant on average, it might be a little bit lower on the margin, but all being equal in this industry, higher volumes equals higher revenues. And those merchants typically also have a longer lifespan, a longer shelf life, and lower attrition as well. So if you’re running a churn and burn shop out of three or four of your agents and only one of them is actually out there producing good deals, your book’s going to skew towards a churn model. And that might not be the business you want to run. And you could say to your agents, Hey, this one, this guy’s doing great in terms of the number of deals he’s submitting. It might be 40% of the actual overall number of deals as these other guys, but his deals are lasting longer, earning more residuals, and that’s building a longer term value of your business.

Anthony Malatesta (24:36):

So you want to incentivize the rest of your agents to perform in the same way, and you want to understand what the attrition is between each of those different factors. So we can break that down in so many different ways, and it’s honestly just a factor of the quality of the data that we get from our clients. And sometimes the clients are like, Hey, we’re going to talk to our processor to get better data so that we can give you more data so that you can give us more insight on how to fine tune what we’re doing.

Christopher Dryden (24:59):

Well, it’s interesting. We have a lot of personalities that come on and they all kind of step in different areas of the business, and we have this kind of consistent theme of what is the ISO and what’s the future of the iso? And we had Alan Pelman on, and I thought he said it really well. He is like, if you’re not selling software, you ain’t going to be here long. And I think that that’s also interesting is breaking down metrics to see who are my merchants and who are my strategic partners. I almost think it’s less end user now and more how do I find strategic partners? Software users is one way for sure.

Anthony Malatesta (25:46):

I would say the deals that I’ve gotten the craziest multiples on in the past 12 months have all been software driven, like books and businesses that if they weren’t software driven would go for 30 x are getting 80 90 from some of them. And those are businesses that have established enough scale where one of them got treated as if it was a software business, and it got an overall top line revenue multiple on its overall business as an enterprise. But at the end of the day, 95% of its revenue is generated by merchant processing. So in essence, that’s iso. They built technology though

Christopher Dryden (26:30):

With the stickiness, right?

Anthony Malatesta (26:31):

Correct. And their customers were all ISVs, and then they had the merchants from their ISVs as well, they generated the processing. Now, there’s a lot of splits that have to be given, and that’s an extremely competitive environment. You need the right product for that, but that’s the way it’s moving. Since I came into the industry, people have been telling me the ISO model is dying, but the economy’s too big, right? No bank, no card network, no technology company is going to be able to hit every nook and cranny of it. And there’s a overwhelmingly large amount of merchants that if something’s wrong, they want to pick up a phone and talk to somebody, they want to have a relationship with somebody and they want to trust that when something goes wrong, that person will help them

Christopher Dryden (27:15):

Out. For sure.

Anthony Malatesta (27:17):

And it’s an opportunity, I think, for ISOs to build brands around that. I mean, payments is a commodity, right? At the end of the day, it’s ones and zeros growing across the telephone line, aside from some of the other products to get introduced to it. So I don’t know another commoditized industry where brand means less than payments.

Christopher Dryden (27:35):

Yeah. It’s funny because one of the things that is always discussed is as a post-close obligation is servicing.

Anthony Malatesta (27:45):

Well, I think that’s the reason, right?

Christopher Dryden (27:47):

And transitioning servicing between the seller and the buyer because if you’ve got a good seller or a seller who’s a good servicer, they’re there because somebody’s picking up the phone at 10 o’clock at night or whatever.

Anthony Malatesta (28:00):

Totally. And it’s a perception thing from the merchants because merchants a lot of times don’t perceive their payments a provider as somebody who provides a service to their business. They look at it as somebody who taxes their business.

Anthony Malatesta (28:12):

And so if you can change that perceptive perception and build a better relationship with your merchants, it’ll come through in the numbers. I’ll look at books where I’m like, you’re just selling terminals to these guys. No software, no nothing. I’m like, your attrition’s on the floor. What are you doing? It’s like, well, we pick up the phone when they call. It was funny. I remember when cash discount first came out, I was like, in the industry, people are like, yeah, it is been a race to the bottom and we’ve hit the bottom. And I’m like, well, somebody just got out a drill and just drilled through the floor with cash discount. We just kept going. Yeah, for sure. There’s subterranean now. And

Christopher Dryden (28:48):

Well, it is because doing rebates, dude, I hear people on their entry. They’re like, the initial overture is we rebate what we get back to you. I’m like, dude, that’s a violation of car brand rules. You’re not

Anthony Malatesta (29:02):

Supposed

Christopher Dryden (29:02):

To be doing any of that. Whatcha talking about Exactly.

Anthony Malatesta (29:05):

But

Christopher Dryden (29:05):

People are actually out actively presenting that.

Anthony Malatesta (29:11):

I would caution those people to think about a new strategy of product to overprice the amount of value that you can give to a merchant today in terms of software, it’s not as difficult as it is to do integrations as it was to do 10 years ago. Totally. The tools are out there, the software products are out there, and there are highly specific business solutions for most verticals nowadays. I was talking to somebody who was doing pool and sauna contractor software. They had gotten that specific, right? So whatever you can find and integrate to and sell, I would tell business owners focus on that because the more you sell your merchants, not just their payment processing software, but their operating system of their software, the more you have an opportunity to now sell them additional products. You can lock them in with a good service. You can be competitive on price, but they’ll be less price resistant if they’re getting more things from you, whether that’s payroll, insurance, HR services, loans. There’s a whole bunch of things that you can sell to merchants. I think all the integrated banking products are going to be really big, but those are things that will take merchant trust to develop. If a merchant doesn’t trust the payment processing provider to process their payments correctly, they’re not going to trust them with their operating account

Christopher Dryden (30:45):

For sure.

Anthony Malatesta (30:46):

So you need to come in, you need to build that rapport, build that cache with them to be able to get that. But I still think there’s plenty of opportunity because no matter who the bank or payment processor is, the market is too big for them to hit everybody, and there’s opportunity to go out and capture market share with more product.

Christopher Dryden (31:10):

Yeah, I agree with you. It’s funny. I see you’re talking about pool and sonic contractor software. I mean, I see that level of kind of specialization detail, but it’s only getting more and more like that. And I think as the merchants become a little more desensitized to the process of interacting with technology, I think that those other value add, if you want to call ’em, whether it’s payroll or some form of lending or micro lending or whatever being built into their POS, that actually takes data that the POS is tracking. Because I’ve always thought with a good POS system, you can see real-time data as far as what sales and receipts of things are, and if it ties into QuickBooks and if you wanted to do underwriting from that, it would be pretty simple and probably a lot better than some of the underwriting I see out there.

Anthony Malatesta (32:12):

Oh, totally. No, that’s absolutely possible. I mean, square was really, really thoughtful with that. I mean, square Capital, they can just look in auto approval loans for you.

Christopher Dryden (32:20):

Yeah,

Anthony Malatesta (32:21):

Exactly. Right from the p os. And they’re a smart technology company, but it’s easy to replicate that.

Christopher Dryden (32:28):

Yeah, I agree with you. Well, we kind of launched into what you were saying, Hey, I want to end this with, but what do you see out in the marketplace these days? I mean, I feel like we’ve kind of been talking about it,

Anthony Malatesta (32:38):

But No, we have, I mean, activity I think generally is up. I think there is a high level of demand out there. There’s still a large amount of interest from institutional capital in this space, which is always helpful for pushing activity. So a lot of the large institutionally backed operators in the space are still hungry for opportunities, still hungry for acquisitions. So there’s still a lot of opportunity out there. I would say from a valuation standpoint, it’s a bit of a gap. The premium opportunities that are out there where there’s growth, cashflow, go forward, commitment to operating, and especially if there’s vertical specificity and technology attached, those opportunities are getting as high as multiples as I’ve seen in the last five to six, seven years.

Jeremy Stock (33:35):

Anthony, I’ve got a question for you. Sure. And this is in regards to Wellesley Financial. What is something that you would want to say to prospective clients of yours who are coming in the door? What’s an issue that you’re facing again and again and again that you wish they had done maybe prior to reaching out to you? Or in other words, what are some of those hurdles to bringing on new clients in your space? Stole my

Anthony Malatesta (34:01):

Question. I would say understanding what you’re trying to achieve with your business longterm. I think I get a lot of questions around, Hey, I want to find that facility. And that’s something that we’re working on too. I think ISOs in particular have had an extraordinarily hard time getting loans at what I would call affordable terms.

Christopher Dryden (34:27):

That’s like any small business though. I mean, there’s not really a loan product for $500,000 and down for a business necessarily.

Anthony Malatesta (34:35):

Yeah. I’m talking probably more between 1,000,010 million, which I think for a lot of traditional businesses, your community bank has been the one that under rents those loans,

Christopher Dryden (34:46):

But you got to get to that type of number for them to have a product for you too.

Anthony Malatesta (34:51):

Correct. Yes. But the funny thing is about the banking industry is that they just don’t understand this space at the local small business lending side. And it’s funny. I mean, I swear out here as a contract with a bank at the end of the day, and I think a lot of the banks in this space also see that as an additional risk. It’s like, okay, we’re already sponsoring these groups to the tune of tens of millions of dollars, hundreds of millions of dollars in terms of the money we’re passing through. We’re not going to also loan to them. I think they just see that as additional risk at times. So lending is one of the areas that we’re building out and have solutions for ISOs that are looking for loans for, whether it’s just general operating or buying up the downlines we talked about earlier.

Anthony Malatesta (35:36):

So having an idea of where you want to go and questions about how you can make your business better. And I think the way we always think about that is like, well, we have to look at the numbers and help get you an insight of how the performance is. That to me, the analytical capabilities that we have, I’ll toot our own horn, and I think we’re the best in the industry at the way we analyze these businesses and allowing our clients to be hungry for those answers of, Hey, what are my KPIs at the levels that I havent seen yet? And can you tell me what can you share with me about how I’ve been operating and be curious in that regard. I think that’s something that every business owner is open to, and it’s a way that me and my partners have looked at our own business around how are we performing? We don’t have a merchant portfolio that we can cut the numbers up on and check just as easily, but we have our own that we track and we manage, and I would want business owners to think about their own. Sometimes it seems, I’m sure you’ve seen this, where some guys, the only number that matters at the end of the day is what’s in the bank account, and if there’s money in it, they’re cool.

Christopher Dryden (36:53):

Yeah, totally. No, but that’s the thing. I had a guy that I’ve known for a long time, and he’s an IP attorney in town, and so when we have an IP issue, I’ll bring him on, but I’ve known him since before either one of us went to law school and he came up, I hadn’t seen him maybe in an office context in maybe three years or so, and he came up and we went out to lunch and he came back to the office and he was looking around and he is like, you guys are really matured. And I think what you’re talking about is business maturity. Finding a business owner that wants to understand a little bit more of what am I doing this all for? I mean, sometimes I just think that takes life maturity to get to that point too. But I hear what you’re saying. I feel like that’s one of those things where you got to have a design. You got to have an actual direction and focus of what you want to do.

Anthony Malatesta (37:54):

I mean, not to get too hippie dippy with it, but everything comes out of your intentionality. What are you trying to do with your life? And that’s an extension of what you’re trying to do with your business at the end of the day.

Christopher Dryden (38:05):

Yeah, no, I agree with

Anthony Malatesta (38:06):

You. I think about that with regards to my business all the time. It’s like, I know what I’m doing this for. I want to establish security for myself and my family. I want to create opportunities for other people to help them live their best lives. That’s why I’m doing this. And I think a lot of folks see that in what they’re doing, but the day-to-day can kind of bring them away from that. And especially when it comes to thinking around long-term planning and exit planning, especially having the goals of, okay, I want to get to this amount of revenue or this valuation in the next 12, 24 or 36 months. If you don’t know where you’re at today, you can’t measure where those goals are in the future. And that’s what I want to give business owners. I want to give business owners an understanding of, here’s where you’re at today.

Anthony Malatesta (39:04):

If you want to sell in five years, do you want to sell for a certain number? Is that number going to be achievable in five years? Okay, if not now, do we need to readjust your goals? Because if you want to get there in five years, we can put ’em all together and we can tell you exactly what it’ll take to get there. Now, it might not be possible with your current level of employees capitalization, but if it does take changes to those things, well, we can tell you, okay, if you hire this many more people, here’s how much runaway you have until profitability becomes an issue. If profitability becomes an issue, here’s how we can raise more money for you. If we can raise more money for you, here’s what that’ll get you in terms of new boards, revenue growth, valuation, growth. We can create all of those scenarios

Anthony Malatesta (39:43):

And game plan as many of them as our clients want. It just takes a little bit of curiosity and willing to go through that process of asking those questions, and we can give those answers and we can do the work if we can get the data from them to do that. So that’s what we provide for our clients. And then when that time comes where they’re like, Hey, somebody called up and they think they can hit my number. I say, great, let’s make sure and tested in the market, because plenty of times I’ve had people say that to me, and I go out and I bring other buyers to the table, and I get them 30 to 40% more from the same buyer just by running a competitive process and making sure that the market validates what they’re worth, that’s what we really helped to have the best outcomes. Then we can take what our clients thought was a good outcome and turn into a great outcome.

Christopher Dryden (40:28):

And I think that that’s really important. It’s kind of like I called it looking under the hood, but you don’t know what you don’t know until somebody helps you with it. So I just think that’s really important because you might testing the waters of the marketplace, it’s also testing the waters of like, Hey, how can my business improve? And having somebody else look at it from outside in, who’s got a good background of watching other similar type entities and business operations, I think that’s super valuable.

Anthony Malatesta (41:00):

And how is the market going to perceive your business if somebody like me doesn’t look at it and you’re testing the market on your own, do you know the questions that buyers are going to ask and how they’re going to tear up your business and diligence? Are you going to be prepared for

Christopher Dryden (41:13):

This question? Yeah, that’s a big one. Diligence. Totally. And it’s getting harder and harder, right? Yeah, exactly. When interest rates went up, the lender in one of ours was in New York, and I think you were familiar with this. They needed an opinion from a New York council during diligence. They didn’t even want my opinion, even though I was representing a party, they didn’t care. It was really interesting. The financial institution was out in New York, so I thought that was kind of interesting, but having somebody who understands the diligence process and knowing what they’ll be looking for,

Anthony Malatesta (41:47):

But even before diligence, just going to market. If there are flaws in your business model,

Anthony Malatesta (41:53):

Isn’t it better that you and I talk about them before we go to market so we can make a decision? Okay, well, that’s a big enough flaw where it’s going to cost you X amount of dollars off the valuation you want. Maybe we take six months. Here’s the game plan to fix it. You come back and fix it, then we’re ready to go and it’s not an issue. Or if we got to go to market now for whatever reason, here’s how we’re going to mitigate it. Here’s a game plan. These are the questions you’re going to be asked. Here’s how we manage it.

Christopher Dryden (42:21):

Yeah, no, I think that’s more valuable than maybe anything else is getting ready. Look, how do people get

Anthony Malatesta (42:28):

Ahold of you? Wellesleys financial.com. We also just launched a brand called merchant portfolios.com where we’ll be at all the regionals under that brand. That’s strictly for the ISO community. So everything I talked about in terms of analytics, portfolio evaluations, analysis, all completely geared towards the ISO channel lending, all that. You can find out merchant portfolios.com. And then myself and my team are at Wellesley Hills Financial and I’m at the regionals. I’m at my 2020.

Christopher Dryden (43:01):

Don’t worry. We flash on your cell phone number right about

Anthony Malatesta (43:04):

Now. Cool. Exactly. Business and personal phone business, that’s fine.

Christopher Dryden (43:11):

Awesome, man. Well, look, I appreciate you coming on. It’s great. Appreciate you being here.

Jeremy Stock (43:14):

Thank you for listening to this episode of The Payments Experts Podcast, a podcast, a global legal law firm. Visit us online today at global legal law firm.com.