The last few months I’ve talked about the acquiring shift to the more direct or employee model versus the independent model and explored the differences between wholesaling and retailing. This month, I’ll look at quantifying different models to help you choose the correct model for your organization. You can have the best sales plan in the world and sign up thousands of merchants but if the organization doesn’t make a return for the owners and shareholders, the sales machine is worthless.
    I will walk you through a very basic tool to compare different sales models. Some of the models can get very complex but I will try and keep it simple. Simple or complex, it is crucial to evaluate different models before embarking on a new channel, as you are looking to maximize your return and not run out of cash. When you create your tool you must make certain assumptions and create key variables. These key assumptions will be the drivers of your various models, which is why I always recommend creating tools that allow you to “plug-in” these key numbers.

Key Assumptions/Variables:

• Number of sales per month for the average sales representative
• Monthly salary (if there is one) per month - including all benefits, phone, gas, etc. (don’t forget to include taxes)
• Up-front costs of acquiring a merchant (signing bonus, free equipment, etc.)
• Internal costs of boarding a new merchant (underwriting, credit, deployment, training, etc.)
• Average net revenue per month per merchant (after processor and support payouts.)
• Average residual per month per merchant schedule (amount paid to the sales representative forever vs. one year vs. sliding.)
• Average life span of a merchant (how many months will an average merchant process with you.)

    Now, all that is needed to do is to put a spreadsheet together. You first must compute your investment or month 0 costs, the costs incurred before the merchant begins to process. These costs include the salary, benefits and taxes associated with the salesperson and the allocated costs (x percent of their full salary and recruiting costs based upon number of reps) of the sales manager for one month. Do not include any annuity or residual. Next, run an analysis of the revenue after residuals on a monthly basis for the average life span of the merchant. This is generally somewhere between 36 and 60 months, based upon your portfolio. You now have a series of numbers or cash flows going from month 0 (the investment) through month 48 (for a merchant with an average life span of 48 months). A second series of numbers titled “net cash” should then be created which compute a running sum of the amount spent or made over the life of the model.
    Based on this little exercise, you can come up with two key numbers. First, you can understand what the payback period (PP) or break even point in the investment is. This crucial number is where the net cash goes from negative to positive. The month in which this occurs is called the payback period and tells an acquirer when he first starts making money. This number helps an acquirer manage cash flow as he grows his sales channel because the farther out this number gets pushed, the longer it will take to turn a profit and go “positive” on a merchant.
    Next, you want to compute your internal rate of return (IRR). This shows what type of return an acquirer is making on his investment and is often the gauge of where to invest capital, as savvy acquirers are looking to maximize the IRR. To get this number, use the “IRR” function in your spreadsheet and use the investment amount as your first “value” allowed by the sum of each subsequent year’s monthly cash flow. Remember, your analysis was done monthly so you will need to compute each year’s cash influx for this exercise. With a merchant having a 48-month life span, there will be five values created and these inputs in the formula will deliver your IRR. Now try this exercise using three or four sales models, employees with different compensation plans, independent contractors, etc. At this point you can begin to see how such tools can be valuable!

Greg Cohen is President of Moneris Solutions U.S., and manages all U.S. initiatives and operations for Moneris Solutions. Mr. Cohen can be contacted at 847-520-6559 or via email at greg.cohen@moneris.com.