Community Brands, Evercommerce and Constellation Software have been on a terror acquiring as many vertically focused ISVs as they can. They seem to have a simple formula: buy and ISV, streamline supporting functions, increase monetization and offer in-house payments. As the payments community has long figured out, a successfully integrated payment strategy can sometimes drive more revenue than the actual SaaS fees.

These growing companies generally target ISVs that are vertically focused. They standardize or replace the service department and reduce overhead in areas like HR, accounting, marketing and operations. Their key to a healthy ROI of the their acquisition model is their ability to not only reduce expenses but increase revenue. Software companies or ISVs with nescient or underdeveloped payments revenue present an opportunity for acquisition, that is not necessarily in the ISVs best interest.

For example, if  “XYZ Holding company” purchased a software company charging $80 in monthly SaaS fees, with an additional $20 a month in reoccurring payments, totaling $100 per customer. Lets assume a total annual revenue of $1.2M and XYZ Holding are able to purchase that same company on a multiple of 10X. We could reasonably assume that with some investment, they could increase their reoccurring payments revenue to $60 per month, increasing their MRR by 40%. The payback now becomes ~7 years. If they are able to reduce expense by a reasonable 20%, the pay back could be estimated at 5.5 years.

While the acquiring entities may be the right fit for certain software companies, it is vital the ISVs have a clear path to a healthy payments strategy that may include Paas(Payments as a Service), PayFac(Payment Facilitator), ISO registration or a lucrative referral model. A poor payments strategy can cost the ISVs founders, owners or shareholders millions on their valuation multiple during an acquisition event. There is never one correct path but it is important for ISVs to have a clear understanding of their payment partners and implications of their payment residuals.