Up-Front Buyout vs. Up-Front Bonus – Selling Payment Processing
I’ve never heard anybody in the industry talk about the idea of the up-front buyout. However, to understand the difference between the up-front BUYOUT and the up-front BONUS is very important. This is not an issue of good versus bad. But you should be aware of the difference. I feel even many experienced bankcard […]
I’ve never heard anybody in the industry talk about the idea of the up-front buyout. However, to understand the difference between the up-front BUYOUT and the up-front BONUS is very important. This is not an issue of good versus bad. But you should be aware of the difference. I feel even many experienced bankcard professionals haven’t learned these two important concepts. In this episode I’ll help you make the most informed decision and get the best deal.
In our industry there are some general residual percentages. These percentages will fluctuate according to resources the processor may provide, such as leads. If there are no resources involved, then you could expect about 50% with an up-front bonus. And you could expect 60% or 70% without an up-front bonus. There are companies which will pay you an up-front BONUS. But there are many companies who offer an up-front BUYOUT.
Understand there are competitors involved in this process; accurate comparison is vital. First, I will endeavor to define an up-front BUYOUT. Heartland Payment Systems does this, and I know of several others who do. The company looks at the long term, twelve month, profitability of the account you sold. As an example, they may say, “Your account is going to bring in $1,200 in gross margin over the next twelve months.” Then they offer to pay you a portion of that one-year profitability. This will seem great at face value. You may get $700 up front! However, most companies then only pay 15% to 25% long term residual. So, the reality is you’re receiving the first year of residual up front, then forevermore you’re only getting that small percentage of residual. That small percent is half or less of the amount you would get if you refuse the buyout offer.
Another company may offer 50% plus $200, $300, or $400. Ask yourself whether that money is an up-front bonus or buyout. The bonus has no impact whatsoever on the profitability of the account. It doesn’t change your residual at all. Consider the following options on the example mentioned – an account generating $1,200 in annual profit margin, total margin.
#1. A 20% residual split. $1,200 annually equals $100 per month. 20% residual split means $20 a month residual. The company offered 50% of the first year’s gross margin, so I’m getting $600 up-front buyout and $20 a month.
#2. 50% and $400 up front. I look at this as $200 buyout value. That’s because I can get $600 from the first company, but $400 with this company without giving up any residuals. This company offers 50% which means I’m going to make $50 a month.
Think about the comparison of these two programs. Option #1 will give me $600. Although it’s $200 more than option #2, the residual in option #1 is only $20 a month. In option #2 I’m going to get $50 a month. That’s $30 more in monthly residual. To accurately compare these, realize you’re selling $30 a month residual for $200. This is a 6.7X buyout. You’re willing to sell your $30 monthly residual for the sum of 6.5 month’s worth when you could get it for a much longer period of time. In this particular situation, that is not a good deal. I understand you may be in great need of that $600. But you should understand what you are giving up to get it.
If the company had offered me 100% of the first year’s profit and were going to give me $1,000 or $1,200, that would be very different. That would be $800 extra. I would be selling $30 a month in margin for $800, which would be a pretty good deal. Be sure to compare your options in that way. This episode is meant to open your mind to the up-front buyout versus the up-front bonus. The goal is to understand which of the options is going to pay the most money. Be careful not to look only at the short-term cash flow. To say, “Woo-hoo! I got $700” is tempting. But consider you could have gotten $300 or $400 and how much more per month? If you would’ve kept the account for even three or four months, you could have sold that $30 for probably fifteen to twenty times its value. That means you could have another $600 by selling that $30.
So, my advice is to be aware of the options. Understand the difference in up-front BUYOUT and up-front BONUS. Make an informed decision and get the best deal!