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Liberty Tax CEO Talks Mergers and Associations

VIRGINIA BEACH — In this second and final part of an interview with Liberty Tax Service's CEO John Hewitt, he discusses the importance of franchisee associations when it comes to franchisor buyouts.

Hewitt's first employer, H&R Block (NYSE: HRB), turned down his vision of using software to prepare taxes. Hewitt eventually branched out to pioneer electronic tax filings when he co-founded Jackson Hewitt Tax Services (NYSE: JTX), a chain of 6,763 offices. The co-founder eventually left the chain when Cendant Corporation, a conglomerate of hotel, real estate and car rental franchising firms, bought it for $483 million. For an encore, John Hewitt founded Liberty Tax Services in 1997, a chain that last year reported having 3,468 franchise locations and 77 company-owned units.

Hewitt thinks that the past few years have shown a tremendous upheaval in the tax preparation industry. The second-largest chain in the industry, Jackson Hewitt, hired Goldman Sachs in 2009 to find strategic and financial alternatives. Hewitt looked into buying the firm. And in July of this year, Liberty Tax explored the idea of a merger with floundering H&R Block, a chain of 4,200 franchised and 6,935 company-owned units. At the time, Hewitt wrote an open letter to H&R Block's founders in hopes of arranging a buyout meeting. "Anyone who has been as dedicated and involved in the retail tax preparation business like the Blochs and the Hewitts must be feeling a touch of sadness watching market share erode," wrote Hewitt in the letter. In regard to Jackson Hewitt's precarious predicament, Hewitt added, "From personal experience I know what it feels like to have a company that bears your last name teeter on the brink of failure, as Jackson Hewitt is doing today."

BMM: What has happened with the July exploration of a merger between Liberty and H&R Block, and then Jackson Hewitt in March of 2009?

HEWITT: It was much more likely that we could have done something with Jackson Hewitt for many reasons. Number one, it's a lot cheaper price. I founded the company. I know the franchisees. I am very familiar with the operations. I developed most of the operating principles when I was there. So there are many reasons why merging with Jackson Hewitt made sense.

What happened with that deal is that I went in and talked with the management team. The [Jackson Hewitt] management team turned a deaf ear because they knew the new company would not need two CEOs and two CFOs. So they knew that they would be out of a job if we bought the company.

Then I went to the Board [of Directors for Jackson Hewitt]. They were not receptive. And then I went to the large institutional investors, the mutual funds. They showed some interest.

Our last meetings were with [Jackson Hewitt's] existing franchisees. That is when we saw major problems that we just couldn't solve. The franchisees at Jackson Hewitt are just bitter and angry. They are disappointed with what has happened over the last ten years, especially over the last three or four years when they have lost nearly one-third of their business.

It is a company in disarray. So we don't want to get involved. If we bring in their franchisees, even if only 50 – 100 of them still have a bad attitude, they'll be a cancer in our organization. So we backed away from that [acquisition] quickly after meeting numerous upset franchisees. That was in the spring of 2009.

This year when Tom Bloch resigned from the board [of H&R Block], I reached out to Tom in an effort to see if there was a possibility that they would entertain us acquiring and running H&R Block. Tom did not respond to my inquiries.

It fell flat. We dropped it.

BMM: In your due diligence in acquiring Jackson Hewitt, one of the first things you did was speak with many of the chain's franchisees. I often hear of investors who do not speak with franchisees before making an offer to buy out a franchising company.

Hewitt: That's crazy.

BMM: Why do you think it is helpful for an investor to speak with franchisees before a purchase of the franchising company?

What we believe in our own franchise system is that the secret to success is to have happy and successful franchisees. What I mean by successful is that they are getting a good return on their investment. Because believe it or not, some people are happy without getting a good return on investment. Without that, a franchise system is in big trouble.

BMM: Jackson Hewitt has an independent franchisee association. Did you speak with the association? In fact, how do you feel about independent franchisee associations?

I spoke with members of the association. Some that I spoke with were members of its board, and some were not. I just wanted to get a sense there. It was easier for me to talk to them than most because I had brought many of them into Jackson Hewitt. They readily took my phone calls and set up meetings because they have known me for 15 or 20 years. So it is easier for me than a normal takeover situation where a stranger is coming in to talk. I thought they were much more honest with me because they knew me.

As far as franchisee associations, I think they are vital. There are many decisions that we make in which we need input from franchisees. For example, just simple things like every customer gets a letter. What does the letter say. We could dictate that from corporate headquarters [the franchising company]. But the people who are meeting with customers every day know what the letter needs to have. There are hundreds of things where we need their input. When you have 2,000 franchisees, some things need to be discussed so we need representatives to sit with us. Not only do we bring them in a couple times a year to meet with us, but we also are on the phone with them almost weekly, asking questions: What do you think about this? What should we do with this?

I believe one of the reasons that most companies are ordinary in this country is that they do not listen to their field people.

You get to be where I am in with 41 years of experience, 12 years with H&R Block, 15 years with Jackson Hewitt, and 13 years here [with Liberty Tax Services]. You get to think that you know everything. But that's crazy. The people who deal with the customers every day know what tools they need in order to service the customers.

We have our ear to the ground, and our franchisee association is the spokesperson for the bulk of the franchisees. If a franchisee has an issue, they can contact their representative. Each rep needs to decide if it is indicative of a general feel across the country.

BMM: When you say "rep," do you mean that the franchisee association elects a representative?

Yes. Franchisees elect their own.

Related Reading:

Part One: Liberty Tax CEO Talks Lawsuits and Franchising

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Staff reporter for Blue MauMau