When the management team and private investors backing digital payments company REPAY were looking for an exit in 2019, they had many strategic options. The company was growing well, both organically and through M&A, and had a strong balance sheet.
After looking at selling to strategic investors or another private equity firm, the management team and Corsair, their private equity backer, opted to go public, but not in the conventional way.
A special purpose acquisition company (SPAC) called FinTech Acquisition Corp. had caught their attention for its successful merger a few years earlier with another payments company, CardConnect. The combined company was later acquired by financial services provider First Data. They decided to work with another SPAC, Thunder Bridge Acquisition Corp., even though the IPO alternative hadn’t yet taken off.
The deal ended up being a big winner for everyone involved, REPAY CFO Tim Murphy said this week in a CFO Thought Leader podcast.
“Corsair was able to get a lot of liquidity at the closing table,” Murphy said. “They’ve since fully exited the business at a much higher stock price than when they entered, and they hit all of their hurdles in terms of earn-outs. It was a very successful exit for them.”
The management team came out a big winner, too, Murphy said, because it maintained a significant ownership share in the company, a key goal.
“We wanted to control our own destiny,” he said. “We liked the control we got as a public company and the ability to access the capital markets.”
SPACs have exploded since then, with some 250 launching in 2020 and more than 550 in the first three months of this year, a trend Murphy thinks REPAY played a small role in helping to reinforce.
“A lot of middle-market private equity firms have realized a SPAC is a great exit for them, able to get more liquidity than they would if they had done a traditional IPO and retain ownership and maybe board seats,” he said. “I think we laid some of the groundwork for some of the companies that have done it following us.”
REPAY launched in 2006 as a specialist in real-time card processing for two large, underserved verticals, loan repayments, including in the consumer auto and home mortgage spaces, and business-to-business payments.
“More businesses want to move away from checks and paper invoices and go digital and payments is a big part of that,” Murphy said. “We’re allowing businesses to accept credit cards from other businesses, and we’re also in the payables part of that world, enabling companies to pay their vendors using virtual cards. These are under-penetrated spaces, still predominantly checks.”
REPAY processed some $15 billion in payments for 15,000 customers last year, a number Murphy said is strong but just a fraction of the $4.7 trillion in addressable market opportunity in these verticals.
“We’ve chosen intentionally these large, growing markets where we think our payment technology really fills a void,” he said.
The company also goes to market in a way that integrates with software providers in these verticals, he said, both on the accounts receivable and accounts payable side, with the goal of enabling a more seamless transaction that can help with retention.
“We might have a large hospital system as a customer that has a lot of vendors they want to pay,” he said. “We facilitate these payments, via virtual card, which is on the payable side, so we think that’s unique — both acceptance and payables — and looking to grow that side of our business. And that part of the world is wide open; in most conversations, we’re competing against checks, not another payments company.”
When he was brought on board in 2014 as REPAY’s first CFO, the company had just closed its first outside capital raise, with New Capital Partners, which wanted him to guide growth by leveraging his operational and M&A experience from a previous company and his Wall Street investment banking experience with Credit Suisse.
“Up until that point, the company was mainly family and friends funded,” he said. “The PE firm was looking to professionalize the organization, and hiring a CFO was the first step.”
Murphy’s first task was growing the finance function, which at that point was just him and a long-time finance officer.
“We were relying on outside advisors to close the books and hadn’t had audited financials, so I was able to put in place new processes, monthly board packages, and establish our KPIs and how we’d report them and how frequently,” he said.
After the company realized two years of organic growth, New Capital sold its interest to Corsair, which looked to Murphy to help guide the next stage of growth through acquisitions.
“We hired a corporate development person who now runs that group, focusing on M&A,” he said.
Digital payments is a volume-based business, so all of the metrics Murphy tracks are computations based on the number and amount of payments the company’s technology is processing at any point in time.
“Everything starts with how many dollars you’ve processed and your pricing on that volume, which results in your revenue and your gross profit,” he said. “So, we look at our take rate, which is revenue divided by volume, and then we look at gross profit take, which is gross profit divided by volume, and then our gross profit margin, which, of course, is gross profit divided by revenue.”
Pricing decisions derive from volume as well, he said. “What is the margin opportunity on that volume? From there, everything else flows to the P&L.”
Basing key metrics on volume simplifies the finance function’s job, he said; as long as the volume and historical margin take rates are known, calculating forecasts is a simple step.
"You can always project the business,” he said.
Strong negotiation basis
Given the role of forecasting in business valuation, which is at the core of merger negotiations, Murphy’s ability to make accurate performance projections as CFO would have been a key part in the merger talks with First Data, REPAY’s sponsor in the 2019 SPAC deal.
As it was, the merger gave Murphy a completely new experience, despite his years in finance, because it required the deal negotiations to take place at the same time his finance team was preparing the company for meeting the regulatory requirements and the external scrutiny that comes with going public.
“As sellers, of course, you’re negotiating a merger while you're becoming public,” he said. “So, as a CFO, it’s a very interesting experience, because of a dual-track … process. You can negotiate the merger as a seller, so you’re really [trying to] negotiate favorable terms.”
By Murphy’s account, the company was successful in doing that. “I think it was a great outcome for everybody,” he said.
Editor's note. An earlier version of this story referred to First Data as the SPAC acquiring CardConnect. The SPAC was FinTech Acquisition Corp.