Residual income is one of the great inventions of American business.
What’s better than getting a check every month for a customer you sold a year or more ago? Not much. I like our industry a lot for this reason among many others – I love getting a check every month regular as rain.
But there are times when cash in hand is worth more than cash in the future. And this is where decision making is tough. How can you think about this decision strategically without getting caught up in the emotional attachment to the merchants themselves or the size of your business? It’s hard, but there are times when it makes sense to sell residuals to create cash and move on to the next step in your business evolution.
Everyone always wants cash – you can’t really have enough of it.
Sometimes you need cash and sometimes you REALLY need cash. This is where residual sales can be an effective answer. Separating wants from needs is the first step in the process.
Everyone is familiar with problems that have to be solved now with cash – liabilities of whatever nature – bank loans, vendor payments, payroll all fall in to this category. Sometimes you just get backed into a corner, and that’s all there is to it. Everyone, myself included, has been there, and you just have to back up ten yards and punt. The entrepreneur’s credo is (or should be) “Live to fight another day.” If you have to sell off some residuals to stay in business, there’s no shame in it. Remember, it’s only merchant residuals we’re talking about here – you created them once, you can do it again.
There are other circumstances in which residual sales make sense – expanding the business for one. It might sound contradictory to suggest selling a piece of the business in order to expand it – but can one step backwards make it possible to take two steps forward?
The question with expansion is always: how to pay for it? There are three basic approaches: use excess profits if available, borrow from a lender or use equity. I am going to assume that if you have enough excess profitability you’re already spending it on expansion. And I am going to assume that you, like me and hundreds of other ISOs, are tired of beating your head against the hard surfaces of bank loan officers desks. They really should get it, but they don’t.
So that leaves us with equity – selling stock in your company to raise cash. That’s a fine idea, many companies have done it. It requires at least six months of planning and presentations, a complete business plan with financial projections five years out, giving board seats and management input to new investors who may or may not know your business. By the way, expect an exit strategy for the investor that usually puts them first and you second. Sound good?
Selling off some of your residual revenues creates equity in your business quickly without all the headaches I noted above. When you liquidate residuals, you don’t have to deal with an investor or give up stock or board seats or pay lawyers to document the deal. It’s simple, clean and fast, and leaves you in control. There’s a cost to financing a business in both time and money, and this is the cheapest, fastest method I know to get your cash and move on to building the business.
It makes sense to consider this alternative when you see an opportunity to expand your business aggressively. Often as entrepreneurs, we see market niches or customer opportunities long before others. If only we had the resources to capitalize on that early vision! I have lost count of how many times I have had to pass on a good opportunity simply because the company didn’t have the resources in hand to address it.
At the same time, you want to be sure that the new opportunity will create more value than you are selling off. Think in terms of buying and selling stocks. You sell a stock and buy another one because you think the one you’re buying will rise in value faster or more certainty than the one you’re selling. That’s the essence of the stock market and of business in general. It makes sense to sell an asset (a stock, a residual stream) when you know you can deploy the funds more productively elsewhere.
There are programs out there today that provide you the ability to start an ISO with absolutely no investment at all – I mean $0. You simply do what you do best – sell merchant processing services and then liquidate as many of those residuals as you need to pay the monthly bills (including your own salary) and you keep the rest. This method builds your residual stream while paying you to do it. It’s a great plan for getting into our business and winding up with a strong business.
Selling residuals, like selling a house, depends on the market conditions at the time you sell. Prices go up and down depending on a wide variety of factors. Sometimes it’s better to lock in value when you can and then invest in something with a higher growth rate.
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