Liberty Tax founder aims to beat namesake firm, now his rival.
When Dave Prokupek, above left, joined Smashburger, it had zero stores. When he left it had 275. Can he apply his golden touch to Jackson Hewitt, where he’s CEO?
FT: So you’ve gone from selling burgers to selling tax preparation.
Dave Prokupek, Jackson Hewitt: That I have. I joined here in March 2014, so I’m just getting through my first tax season. After I left Smashburger, I wanted to look at doing something fairly significant with scale around franchising.
Prior to Smashburger I was 20 years with Wall Street running brokerage firms, a lot of financial services background, and a lot of heart honestly for average consumers who weren’t getting fair access to various financial products. So I’ve always had a lot of heart for the customer base like Jackson Hewitt’s, hard-working Americans getting a fair shake.
FT: Really? Aren’t you owned by a hedge fund, the type of firm your average American loves to hate.
Prokupek: HIG Capital owns Jackson Hewitt. There was a clear need for a change, and I’m a change agent kind of person. I liked the fact that it was the No. 2 in tax by units, and had a rich history. But I thought there’s a lot of opportunity to accelerate growth here, and utilize a lot of what I learned from Smashburger around building a great brand. I bought a big stake and took it on, partnered up with the HIG folks, came in as CEO to see if we could re-ignite the growth here.
FT: The company has had a lot of problems, including a trip through bankruptcy court in 2011.
Prokupek: The state of things are well documented. The company had been public, had gone private through a restructuring two to three years prior to my arrival. The tax industry had gone through a major shakeup. After the financial crisis, the whole industry had to re-find their way about what their purpose was and how they were going to grow and differentiate themselves.
FT: What did you focus on first, in your first 120 days?
Prokupek: We had 700 to 800 franchisees, very resilient. They were here to win. A lot of strong entrepreneurs. And we had a healthy company financially, meaning the business was not over-levered, it was less than 2 ½ times levered, with stable cash flow, that was growing modestly. What it needed was a jump-starting to re-excite everybody about what taxes could be, and what the experience at retail could be.
The opportunity I saw, the industry was not differentiating itself from one brand to the next. One of the things I did was look at what do consumers feel about their tax preparation experience broadly. The bar was not that high in tax. The consumer overall wasn’t digging the experience.
FT: What did you find that customers weren’t getting from others?
Prokupek: For one, an advocacy piece. Our customer on balance makes less than $75,000 a year, and we have a lot who make less than $40,000 a year. There aren’t that many brands out there that are the advocate for the hard-working American. It started with an advocacy piece, and then it started with simple things like cleanliness of stores, and being open when you say you are.
We also spent a lot of time this summer on a preparer pledge, no different than the pledge when you get the Starbucks coffee and the barista will get it right. We came out with what I call a manifesto. It starts out by saying, We’re the lucky ones, and we get to help the single mom and the people getting up and working and the nurse and the student. We got people reading it, and posting it, and people in our stores get teary about it.
FT: You’re making my head spin a little bit. A former hedge fund guy who’s getting teary over the little guys?
Prokupek: After I owned an investment bank with the Thomas Lee guys, I was one of the first guys to start a whole series of mutual funds with $500 minimums. So I’ve really always believed that the little guy has never gotten a fair shake as it relates to financial services. I’m a big believer that there should be equal access to the same kind of advice broadly in financial products up and down the economic spectrum.
FT: You must be an Elizabeth Warren fan. I never would have predicted that.
Prokupek: [laughs] Yes on her message, maybe not her delivery. We have 6,300 stores now, and we have this big relationship with Walmart, for 15 years. We have Jackson Hewitt-branded kiosks in 3,000 Walmarts, and we’ve added another 300 stores there. Walmart is a very important customer of ours, and I think we share a lot of values with their customer base.
So this year we grew our footprint for the first time in a while. We added 40 to 50 new franchise groups this year, and I’m looking at adding 100 to 150 franchise groups over the next three or four years. So looking out over the next two or three years, I would guess we’ll add 100 to 300 new stores a year. Half of that will come from franchising, but we’re re-kick- starting our corporate growth.
FT: You believe in adding corporate stores, too.
Prokupek: I do. This is a personal opinion. I think to be a great franchisor you need to be great at your business. I think many people in franchising are sales organizations and they’re not great operators. I believe to be a great franchisor you need to eat your own medicine.
FT: What did you learn at Smashburger that you apply at Jackson Hewitt?
Prokupek: There’s a lot of lessons. At Smashburger there were a lot of things that we did right, and simple things like having everyone on the same POS system, so the ability to get at data was really strong. That’s a simple example of things we insisted on. When you’re running retail, you’ve got to live in your stores, you’ve got to know what’ s happening.
At Jackson Hewitt, we’ve put in a real-time consumer scoring mechanism. We used a company called In Moment, and we are communicating with our clients, and that feedback is coming back in real time, to corporate and the store managers. We put in a dedicated social media department, so in the middle of tax season, I have 10, 12 people where we used to have none.
FT: You left Smashburger badly, with a lawsuit filed over your compensation that’s still making its way through the courts.
Prokupek: I wouldn’t say badly. It’s a money thing, that’s all. For me it was a great brand and great people, and it’s an important part of my life and positive. I feel good about that. The money part will take care of itself.
FT: John Hewitt, Jackson Hewitt’s founder who now runs Liberty Tax, told me he thinks Liberty Tax will surpass Jackson Hewitt this year, and become No. 2. Is that true?
Prokupek: [laughs...pauses] I haven’t met John. Everybody tells me I have to. I don’t think so. He would be defining that with his own survey. (See John Hewitt’s view in story above.)
FT: You mean, using his own numbers? How do you rank yourself against competitors?
Prokupek: The world’s divided into online and in the store. So 40 percent of the returns in the U.S. are done online and the No. 1 player there is TurboTax. They’ve got 35 or 40 percent, and they don’t have any storefronts. And then 60 percent get done in store, by a paid preparer. And within that, Block’s got about 15 percent market share, we’ve got 4 or 5, Liberty’s got 3, and the rest are independent people.
Liberty has been growing its offices; we’ve been more flat. You’ll start to see us grow our footprint 3 to 5 percent a year, starting next year, so you’ll see us flexing our muscle more. You’ll see us growing online, through mobile. A big part for us is what else besides the core tax product can we do and do our clients need from us, that makes us more the center of their life.
In the beginning, John Hewitt, right, founded Jackson Hewitt. He grew it, sold it and started another firm. What’s next? ‘I have to get to No. 1 or die trying,’ he says.
FT: You had a big year at Liberty Tax.
John Hewitt, Liberty Tax: Liberty Tax has over 4,000 units, and we did a couple major things this year. First of all we started our totally Hispanic brand called SiempreTax+, it’s all bilingual. Every employee is fluent in Spanish. It’s for the burgeoning growth in the Hispanic market. Second, for the first time in my career we opened before January 1, before November 15, the deadline for the Affordable Care Act.
FT: You mean ahead of the deadline for people to sign up for health insurance, or pay a penalty to the IRS?
Hewitt: Yes, this is the first time you have to report on the tax return either the credit or the penalty. We’re mostly doing it to get that tax return volume. However, it’s an opportunity for some of our tax preparers to generate some extra revenue. For the ACA work, both H&R Block and Jackson Hewitt are forwarding their customers to a website or an 800 number. We’ve taken the aggressive approach and we’re leading the market in terms of the number of licensed tax preparers.
FT: You don’t want H&R Block or Jackson Hewitt to get those customers first?
Hewitt: I’ve been taking on H&R Block since 1982, so for 32 years. And even though I’ve done very well I’ve always been chasing that dog. And first in market is very important. So we wanted to be first.
FT: You were a star broker at H&R Block, in your early days.
Hewitt: In my 12th year I was the youngest regional director for Block, and my dad was a CEO for a public company. He bought an Apple computer, and he liked the Apple computer better than the mainframe that his public company was being run on. He said, John, let’s computerize taxes.
He quit his job and started programming. I joined him in 1981, and we built the first tax software ever for an Apple computer. And then I got unlucky and lucky. We finished the program and there were no buyers. We tried to sell it to Block and they said they were never going to computerize. There weren’t even 30 Apples in the country at that time.
We found Mel Jackson tax service, and Mel Jackson had died and his widow was running six offices. We bought Mel Jackson tax service from his widow. We took venture capital and went public, and sold it in 1997 as a public company for $477 million in cash.
FT: Did you get forced out in that deal?
Hewitt: To make a long story short, a company called Cendant had 35 franchise systems, and we had a CEO in 1997 that convinced Cendant to pay us three or four times what the company was worth, because Cendant had Century 21 and Coldwell Banker and Avis and Day’s Inn. I made a lot of money. I still owned 5 percent of the company, and I was set for life. But I didn’t want that. My goal since 1981 is to be the biggest tax preparer in the universe.
FT: And how close are you to that goal?
Hewitt: This year will be the first year we’ll pass Jackson Hewitt and be No. 2. (See the Q&A with Jackson Hewitt’s CEO, opposite page, for their response.) It’s not a champagne toast. It’s kind of expected. In my eyes I’ve always been No. 1. I’m kind of cocky, and I think I’m the second best in the history of the world, after Henry Block. But would you want that on your tombstone, he’s No. 2? I have to get to No. 1 or die trying.”
FT: How long will it take to beat Block?
Hewitt: H&R Block has 10,500 locations. Our goal is to be No. 1 by 2020.
FT: Jackson Hewitt has had a lot of trouble in the years since you sold it.
Hewitt: Cendant sold it back to the public in 2004, sold 100 percent of the company for about a billion dollars, so they doubled their money. They’ve had a series of poor-performing CEOs, and to make a long story short, they bankrupted the company, and so the company’s bonds were bought by a hedge fund, and this hedge fund has kept Jackson Hewitt.
I’m almost guilty that we don’t grow faster because Block and Jackson Hewitt are stumbling. I’m glad I don’t have to compete against Apple or Amazon or one of these great companies. They’ve both changed CEOs seven times in the last 12 years, so there’s no continuity. The CEOs come in and they don’t listen to the franchisees.
FT: So what’s your biggest threat now, TurboTax?
Hewitt: Not at all. There are always some people who want to do their own return. Over the last 12 years or so about 60 percent of people pay a preparer every year. The TurboTaxes of the world have grown at the expense of paper and pencil, so that growth has slowed for them because the number of pencil and paper is down to almost zero.
TurboTax shut down their entire system for an entire day a couple weeks ago, because of fraud. That’s a danger to TurboTax.
I’m 65. The goal is to get to No. 1 in offices by 2020, and No. 1 in online by 2025. TurboTax holds that spot now. So I have 10 more years of hard work.
FT: What do you think when you see a company with your name on it go bankrupt, like Jackson Hewitt did?
Hewitt: It’s kind of a little bit good and a little bit bad. I don’t put that much thought into it.
FT: What could be a little bit good about it?
Hewitt: Because they’re our competitor, and if something bad happens to your competitor, it’s good.
I’m sure you’re familiar with Dennis Rodman, the crazy basketball player. They said to him, your own teammates hated you, you had fight after fight in the locker rooms with your own team. You were despised. How did you get along with Michael Jordan? He said, when Michael and I step onto that court we would rather die than lose.
And that’s how I am. When I get into the heat of the battle, I don’t care what you make. Even when my kids were six, seven, eight years old, I never let them win. Winning isn’t everything, it’s the only thing. So I don’t mind beating up my own name.