The private equity world has no idea how payments works and it’s costing them dearly.

A1 Garage Door’s exit to KKR for $2B should be the wake up call.

A1 Garage door was running on nearly 25% EBITDA margins.

And 25% of that was coming from a clever arbitrage at checkout.

If A1 traded for 20x EBITDA, this implies that ~$500M of the purchase price is attributable to a single arb.

What is it?

Let’s begin with the basics.

By and large, private equity funds strongly “request” that their portfolio companies increase prices 1-2x annually.

And it’s a blanket 2-5%.

Virtually no fund or portfolio company is undertaking the data science to determine either the optimal price increase, or the effect on customer churn.

Parametric survival analysis? 

Inflated Poisson? 

Hierarchical Bayesian?

In your dreams.

They run the price increase like a Nike commercial: just do it.

Now, a logical person would examine this tactic and come to the following conclusion:

If I increase my prices and my customers don’t like it, they’re going to churn.

And this is where the greatest arbitrage in the history of private equity is being entirely squandered.

Accepting credit cards (and to a lesser extent ACH and other electronic funds transfers) is a very material business cost.

For A1, about 300 basis points of their top line revenue evaporates thanks to the cost of payment acceptance.

If we set A1’s EBITDA margin to 20% – which is what it was before they implemented their fee – those 300 bps becomes 15% of their EBITDA.

And payment acceptance costs only ever increase for two reasons:

1. Visa and Mastercard are duopolies who perpetually increase fees to meet shareholder expectations. Despite being perfectly indexed to inflation, swipe fees have outperformed inflation at a rate of 4.4x.

US total swipe fees vs. CPI inflation cumulative growth 2010–2025. Swipe fees grew 209.8% while CPI grew 48%, fees outpaced inflation by 4.4x. Source: Nilson Report, BLS.

2. Payments are increasingly bundled with software. Once you’re locked into a system of record (like A1 is with ServiceTitan), the software knows it’s practically impossible to switch. There’s no motivation for the software to provide competitive economics, modern features, or responsive support when you’re a hostage.

As an example, Toast merchants are paying nearly 3x market rates for payment processing, Shopify merchants 4x, and Mindbody had accounts at 8x market rates prior to going private.

Not exactly an encouraging situation, I admit.

But there is a miraculous silver lining in all of this.

In payments, there’s a way to not only offset the expensive costs of card acceptance but do so in a manner that sidesteps the risks associated with private equity’s traditional price-increase playbook.

It’s called dual pricing, and it’s a strategy we’ve employed beyond successfully at thousands of businesses, with private equity sponsorship and without, completely backed by data science.

The goal of dual pricing is to create customer choice:

If the customer pays with a high cost of tender (i.e. credit cards), they pay the now-standard, higher price.

If the customer elects a lower cost digital tender – like ACH – they receive a discount.

Note: you could discount cash, but cash often creates issues businesses seek to avoid.

In either case the business washes out the cost of card acceptance and accretes it to EBITDA.

The merchant’s positioning simply becomes this:

We’d rather pass you savings than pay bank fees.

Now the customer has control over the price they pay.

This is in stark contrast to traditional price increases that give the customer no option but to churn.

And this is how A1 drove an incremental 25% EBITDA that didn’t scare away new fund sponsors.

For those who are wondering, dual pricing is completely different from credit card surcharges, which not only fail to offset all card costs (surcharges 1) are capped 3% despite AMEX and business cards costing more than 3.5%; 2) cannot be applied to debit cards which are increasing in cost as they accrue rewards; and 3) are being legislated as impermissible at the state level, requiring dual pricing to maintain compliance) but have been shown to lower customer satisfaction per JD Power research:

… satisfaction with the overall cost of payment processing services among small businesses that implement these credit card surcharges is 24 points lower (on a 1,000-point scale) than among those that do not add a credit card surcharge.

Dual pricing is a pricing arbitrage that can only be taken once, however.

And if you miss it, the next buyer who is willing to listen to reason captures the upside.

For example, when Leonard Green sold SRS to Home Depot for $18B in 2024, one of the first actions taken by Home Depot was to implement a pricing scheme that rewarded lower cost payment methods.

70% of SRS’s card volume moved to these lower cost tenders, netting them well over $100M in EBITDA and costing Leonard Green nearly $2B in enterprise value.

Once a sophisticated fund knows this arbitrage, they price it into deals.

As the multiples for trade services roll-ups reach fever pitch, dual pricing math is how you can make the numbers work.

Assuming you trust data science and are eager to capture this arbitrage in your portfolio, you’re confronted with three painful realities.

First, you’re likely growing the portfolio company through acquisition, inheriting whatever systems these businesses use. Centralizing to a single system of record (DMS, EHR, ERP, PMS, POS, et al.) is a real lift.

Second, even if you wanted to implement dual pricing, the systems of record almost never enable that feature.

That’s because nearly half of softwares who embed payments choose Stripe, and Stripe lacks native dual pricing support.

Trying to force the payments arbitrage through a system that wasn’t built to handle it results in a disjointed, manual process, which leads to the last point.

Third, assuming your software offered dual pricing, you must ensure it’s compliant across all levels of enforcement: federal, state, local, AND the card schemes. If not, boy can those penalties be costly.

Here’s an arborist software, undoubtedly on Stripe, implementing a non-compliant convenience fee.

I would not only instantly win the chargeback if I filed the dispute, but if this merchant were reported to Visa the merchant eats a nice, fat fine that can stretch into hundreds of thousands of dollars.

Per occurrence.

You’ll never find me supporting the arbitrary and capricious rules of the card schemes, but that doesn’t mean merchants are at any less financial risk.

But even if you checked the boxes on all three of these concerns, you’re still at the mercy of the software.

And guess what?

Softwares are growing increasingly greedy.

Toast highly encourages its merchants to surcharge and still charges them processing fees.

Boulevard does the same.

So even if you successfully managed to implement compliant dual pricing you could find yourself paying processing fees to your software anyhow.

See if you can spot the trend of payment take rates from the first generation of software companies to mandate payments. Keep in mind that payments are perfectly indexed to inflation:

This is precisely why we built POS+.

POS+ modernizes your payments without replacing your software.

Switching your core accounting or ERP system is expensive, slow, and disruptive.

POS+ uses AI to integrate with the platform you already use and add modern payment tools on top.

Have seven disparate ERPs in the portfolio company?

No need to rip and replace: POS+ sits on top of each system, consolidating workflows on a single payments backend while extending modern features like compliant dual pricing to take advantage of the payments arbitrage.

Most critically, POS+ eliminates the hostage dynamic with your software, putting you in complete control of your payments infrastructure.

It doesn’t matter what payments features the software cares to support, or what payment economics they attempt to mandate: POS+ gives you complete optionality.

For years, funds have been comfortable pushing price increases without any statistical validations, potentially increasing customer churn while remaining completely exposed to rising payment acceptance costs.

Dual pricing is the free arbitrage that not only works, it clearly commands a higher exit valuation.

The question isn’t if funds are executing the arbitrage; the question is if your fund has the operational foresight to take advantage.