One of the easiest ways to find out if you truly own the residual you are building is to ask your processor to buy your portion of the future residual. I am going to start with a brief example of a “buyout.” Then I will give you some tips on when, why, and how to best take advantage of this quick cash resource. Make sure you download our free “Guide to Selling Merchant Residual Portfolios” to learn more about residual buyouts, how they work and how to find the right buyer. CLICK HERE to Get Your Free Copy
Let’s say that you make twenty sales this month with an average total profit of $60.00. Then let’s say you get a 50% residual split or $30.00 per month on average from each account. This means for these twenty accounts you would receive roughly $600 per month in residual once they are all processing.
First of all, that you can give yourself a $7,200 per year raise with one month’s hard work is awesome; isn’t it?
Secondly, you may not quite realize how much these sales are really worth. After four months perhaps you decide you want to sell your portion of the residual back to the processor. In other words, the processor will give you cash up front. You will no longer receive any residual on the accounts which are part of the buyout. One large processor would pay you fifteen months worth of residual up front which in this case is ($600 x 15) $9,000. And they would pay an additional 9 x $600 over the next twelve months, depending on how many of the accounts stay with them and how the residuals over the next year compare with the buyout amount. This is a total twelve month income of $16,200 from just twenty sales (not including the up-front compensation on the accounts) for one month’s work. This is amazing and very realistic. So let’s go over some of the rules for doing a buyout with this example processor and some tips on the financial aspects of the transaction.
1. An account must be active for at least one month in order to be included in the buyout. However, the account really needs to be “seasoned” or active for three months. Otherwise, the processor gets a steal, and you get bad deal. The buyout amount is calculated using the average residual over the previous three months. So let’s say you just sold someone. You get $12.00 residual the first month and $40.00 the next month (the first full month of processing.) Then if you sell that account as part of a buyout, you will only get ((($0.00 (first month of no processing) + $12.00 + $40.00) / 3) x 15))) = $260 up front. If you would have waited two more months to sell, you would have received $600 ((($40 + $40 + $40) / 3) x 15.)))
2. The buyout does not affect your up-front payout in any way. You still get all your up-front money, and the processor does not take any of it back when you do a buyout. The buyout is in addition to the up-front compensation and any residual you made before the buyout agreement on that account. The processor is only buying your future residual. However, if you do have a negative balance on the bonus report from sales which cancelled or were never activated, they will take this out of the buyout before depositing the buyout funds into your account as a general rule.
3. The more accounts you sell, the better chance you have of receiving a second payment. If more than 10% of your accounts cancel, you may not able to get your second payout. One way around this is to do an all up-front buyout. In that case, you can usually get 18x to 24x depending on the size of your portfolio and how much of it you are trying to sell. But then you don’t get any additional funds from the buyout over time. Usually in this scenario your remaining residuals are used as collateral to cover attrition on the buyout.
Now you know how the buyout works; let’s talk about when you should use it:
1. When you are starting out, as a way to replenish savings. Let’s face it, this business can be really hard. You can’t always get the fifteen or twenty sales you need every single month. You go through some tough times and need some cash to keep going. Most agents realize they are starting a business and are prepared to make it for three or four months on very little income. However, when you get to the end of the four months, you may realize you need another three or four months to get the business going. Then do a small buyout and put $10,000 in the bank to replenish your savings. Be careful you do not go backwards by selling more accounts than you are generating in a given four to six week period. In other words, if you got thirty accounts in the last three months, don’t sell more than ten or fifteen accounts. You ultimately want to build residual. Don’t sell more accounts to the processor than you are adding.
If you are looking for a buyer, I have a company I recommend that specializes in buying merchant residuals portfolios. CLICK HERE to Get a Free Offer On Your Portfolio.
2. When you are looking to stabilize your business. Sometimes a buyout seems like a good idea if you are moving into an office, bringing on a customer service person, sub-agent, or doing a marketing campaign; resist the urge to do this!!!!!!! Do not sell your accounts to grow your business. Only sell your accounts to survive and stabilize your business. Let’s think about the logic of this for a second. Perhaps your current residual is $3,000 per month. You can’t afford to hire someone or pay rent on a new office, so you do a buyout in order to afford these things which takes your residual down to $2,000. Obviously, this is not smart since you now have even less money to fund these new business expenses. If you have a mountain of debt from a previous business or if a family emergency is taking all of your time, do a buyout for some cash to help you make it through a difficult time. But keep making sales.
So when should you not do a buyout? Don’t do a buyout in order to take some time off or to “take it easy” or “slow down a little.” This is a terrible idea! When you do a buyout, you should feel almost in a panic to replenish the lost residual. There is a huge temptation to do a buyout when things are a little tough, but resist this urge. Otherwise, things will go back and forth from GREAT!!! to TERRIBLE!!! every few months as you do a buyout and then use up the cash from that buyout. Your ultimate goal is to grow your residual, so don’t sell more than you are growing. If you do a sale, sell like a crazy person until you get that residual back. Comment below with any questions on how this program works or the best way to utilize it.