Selling A Check Cashing Business
The check cashing industry serves a unique and specialized niche in the South Florida economy by allowing non-banked individuals to cash checks. Most check cashing store customers are small business owners or construction-related workers who do not have a bank account or do not wish to deposit checks using a bank. For a fee based on the amount of the check, the these customers can cash their checks without involving traditional banks. While it sounds simple, check cashing companies are governed by the Florida Office of Financial Regulations and subject to audits. Let’s explore this highly profitable niche and how to properly value check cashing companies when it comes to sell.
How do Check Cashing Companies Make Money?
- Most small check cashing companies will cash a customer’s check for approximately 2% of the amount of the check.
- So if the check is $1,000, the check cashing companies will keep $20 (2% of $1,000) and give the customer $980 in cash.
- It is important to note that most check cashing franchises or chains charge 4% or more to cash checks.
- This is because the the larger check cashing companies verify checks prior to giving the customers their cash, and the verification process has fees and costs which the larger companies pass along to the customers (via higher check cashing fees).
- In contrast, the large majority of smaller ‘mom and pop’ check cashing companies do not verify checks prior to cashing their customers’ checks.
- Instead, they typically only cash checks for repeat customers (or customers referred by repeat customers) who they know and trust.
Cost Structure of Check Cashing Companies
Check cashing companies have a very simplified cost structure. First, most small check cashing companies may be owner-operated with no employees needed. While it only takes one individual to operate a cash checking store, the long operating hours force most owners to hire at least one employee who they trust to manage the store. Most check cashing stores are less than 1,000 sq ft, and thus have minimal rent and overhead costs. Advertising is also minimal, since most small check cashing stores only cash checks for known customers or customers referred by known customers. Other significant costs for small check cashing companies are banking fees (payable to the bank where the checks are deposited) and the fees necessary to have cash delivered to the store.
Working Capital Needs of Check Cashing Companies
Working capital may be defined as the operating liquidity needed by a business to operate. For a typical check cashing business that cashes $1M per month in checks, they will need about $200K in operating liquidity (or money in the bank at any given time). The higher the working capital, then the larger volume of checks that the company may cash. On the other hand, working capital is also a major cost that the check cashing company owner incurs. Whatever the cost of starting or buying a check cashing company, the working capital needs must be accounted for and added to the initial start-up cost. It is best to find a balance between having sufficient working capital to meet customers’ needs and carrying too much working capital which raises the costs of doing business.
Valuing Check Cashing Companies
Any check cashing company owner should consult a professional business broker in order to properly evaluate and price their business. The first step to do this is uncovering the true owner benefit of the check cashing business. This technique is relatively simple for a check cashing business because of its simplified cost structure. So long as the gross volume of cashed checks is known, a buyer can deduce the net revenue of the check cashing company by applying the ‘take percentage’ (typically 2%). The fixed costs such as rent and overhead are easily known while operating costs (such as payroll and banking fees) may vary depending on the buyer.
Example of Valuing Check Cashing Company
- Let us suppose that Charlie’s Check Cashing Company has cashed a total volume of $12M in checks during the last 12 months.
- Charlie charges a take rate of 2% for his customers, which means that Charlie’s revenue was $240K (2% of $12M).
- Charlie’s business broker must then determine his true owner benefit.
- Thus the business broker calculates the total rent, overhead, banking fees, fees for the cash to be delivered to the store, and payroll (for one employee managing the store).
- These business expenses are deducted from the $240K of revenue in order to determine the owner benefit.
- Note that the business expenses may vary depending on who the buyer is.
- For example, Charlie may sell to a competitor who already own a checking store.
- This competitor is likely to have far lower banking costs than the seller because they already are using a bank account to conduct check cashing activities.
- Charlie’s owner benefit is calculated to be $120K.
- Charlie’s business broker then applies a multiple to the owner benefit when deriving the recommended asking price.
Many Cash Checking Companies Receive Premium Valuations
In the cash checking industry, buyers are typically willing to pay 3-4 x the owner benefit of a check cashing business. This assumes that the new owner will not need to work full time in the store, and that therefore some payroll expense was factored in when calculating the owner benefit. Many check cashing companies have traits of very good businesses which creates a premium valuation. These favorable traits include the regulated and insular nature of the check cashing industry which limits competition, along with a repeat ‘book of business’ from vetted customers with an established track record of not cashing bad checks. On the other hand, buyers must be cognizant of the high working capital needs in the check cashing industry.
The check cashing industry is often overlooked by many buyers. Although not for everyone, it is a very lucrative industry with high barriers to entry that may provide a sustainable income stream.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.
