Forced out of Liberty Tax Service, founder John Hewitt will try again
John Hewitt describes his new company, called Loyalty Brands, which he says will have four franchise concepts including a tax prep service, his third such franchise after Jackson Hewitt and Liberty Tax.
Photos by Echard Wheeler
One month from now, on March 6, 2019, to be exact, John Hewitt plans to launch his third tax preparation franchise from scratch, just like he did twice before with Liberty Tax Service and before that with Jackson Hewitt. Why that particular date? “On March 5 my non-compete ends,” he says triumphantly, from when he was ousted as CEO of Liberty Tax in September 2017.
With his trademark braggadocio, Hewitt, age 70, says he expects to duplicate his success with his third tax brand, to be launched under the umbrella name Loyalty Brands and to also include three other franchise concepts. “I’ve sold 5,000 franchises in my career. That’s got to be the top 10 in the world,” he tells me from the shared conference room in his new headquarters in Virginia Beach, Virginia, where in October he had leased a suite of offices but had not yet furnished them.
“I founded two of the top 200 in the industry, so I can do it again,” he says, and indeed Liberty Tax grew from zero franchises in 2000 to 4,000 by 2012, before sinking by a thousand as the entire tax preparation industry also declined. He bought the six-unit Jackson Hewitt in 1982 and built it to a $483 million sale in 1995; he says he owned 5 percent of the shares at the time it sold.
But there’s one thing he won’t want to reprise with his latest company—the chaotic finale to his tenure at both brands, which ended at Jackson Hewitt when he was forced out in 1995 and then the company filed for bankruptcy. At Liberty Tax, the board fired Hewitt as CEO amid an investigation of alleged financial self-dealing and sexual misconduct that is the subject of multiple lawsuits and led to the value of the publicly held firm dropping last February to $7.75 per share, half their value than the previous September.
Despite his firing from Liberty, Hewitt remained chairman of the board because he controlled all the Class B shares, which allowed him to appoint his own directors and back a new CEO, Nicole Ossenfort, to take the job in February 2018. Finally, by July 2018, he agreed to a buyout by Vintage Capital Management, which bought 2.33 million shares or 16.7 percent of Liberty Tax stock, including all of Hewitt’s holdings, for $20.58 million. Hewitt will take his proceeds to fund his new company, Loyalty Brands.
The past two years have been “civil war. It was the worst battle ever,” he said in the interview in October. He attributes both battles to “evil venture capitalists” and the latest ordeal took its toll. “I was devastated, but you have to kill me to stop me.”
Nicole Ossenfort was named CEO of Liberty Tax in February 2018. “It really is a new day at Liberty Tax,” says Ossenfort, formerly a top-performing franchisee in the system.
At least five significant legal actions detailed in the company’s quarterly report maintain that Hewitt was the cause of the trouble. Most sweeping is a consolidated class action complaint filed June 2018, covering purchasers of Liberty Tax shares between October 1, 2013, through February 23, 2018. Its lead plaintiff is Local 98, a multi-employer defined benefit retirement plan. It alleges a long list of claims against Hewitt, Liberty Tax and former Chief Financial Officer Kathleen Donovan.
The complaint says the defendants made a “series of false and misleading statements about the company’s internal controls and its active efforts to root out fraud and other misconduct.” They aimed to “conceal from investors the company’s ongoing funding of defendant John Hewitt’s reckless conduct that placed the company at risk, permitted the loss of millions of dollars of company funds, and created a detrimental ‘tone at the top’ and hostile work environment that reduced productivity and weakened the company’s financial condition.”
Hewitt “treated the company as his playground,” the complaint continues, “with the company knowingly condoning and footing the bill for his reckless escapades that included dating countless employees, routinely having sex with employees in his office, using company resources to further his romantic relationships by, among other things, directing the company to hire countless of his girlfriends’ friends and relatives to ‘made up’ positions for which they were nevertheless unqualified.”
The complaint accuses Hewitt of “billing the company for lavish vacations with his girlfriends at least every other weekend, and creating a hostile work environment which exposed the company to significant financial risk and liability, including a $500,000 payment to settle employees’ hostile work environment charges.”
Tariq Mundiya of Willkie Farr & Gallagher is the attorney for Liberty Tax in the litigation pending in U.S. District Court for the Eastern District of New York, and sent this response: “The lead plaintiff does not quantify any alleged damages in their Amended Class Action Complaint but says that Liberty Tax shareholders bought stock at allegedly inflated prices and purportedly suffered financial harm as a result. Liberty Tax disputes these claims and is defending the matter vigorously.
“Liberty Tax and the other defendants moved to dismiss the Amended Class Action Complaint. That motion has not yet been heard or decided. Liberty Tax believes that the lawsuit is a misguided attempt to impose liability on the company for conduct that is not actionable under the securities laws. In addition, we believe the litigation—which is a lawyer-driven strike suit—cannot show that plaintiffs were harmed by any of the conduct that is alleged and fails to state a claim as a matter of law. Liberty Tax looks forward to the Court deciding the pending motion to dismiss.”
‘What’s wrong with that’
In the interview, Hewitt downplayed the accusations and often diverted the questions to other topics. The problems started when Liberty Tax began to do poorly, he says, along with other brands in the tax preparation business. Liberty Tax got to 4,000 offices by 2012 but then shrank to 3,000, he says. “It became less attractive,” he says, referring to the industry, and questions arose. “Is the CEO over the hill, lost his touch? Internally they thought it was me,” he says.
“My enemies chose to attack me with character assassination. They didn’t realize or care if I got bad press.”
The accusations are “almost all unfounded,” he says. On the claim that he scheduled meetings with out-of-town franchisees to coincide with baseball games by his beloved New York Yankees, he scoffs. “No one has accused me of benefitting five cents from that,” he says, adding, “four times in 20 years I went to a Yankees game outside of New York City.
What’s wrong with that?”
I asked him if the allegations that employees heard him having sex in the office were true. “A guy came to my office at 7 a.m. He heard sounds that sounded like sex in the office. I didn’t refute it,” he says. So is that a yes, I asked? He didn’t directly answer.
As for the allegations that he hired the relatives of women he dated, he said he had hired three children in their teens for minimum wage. “So yes, some women I had dated, I hired their children.” He then declared he didn’t play favorites with family: “During my career at Jackson Hewitt, I fired my ex-wife. During my career at Liberty I fired my son and my daughter,” he said, then turned to another topic. “I have a beach house on the oceanfront. For 21 years I’ve had thousands of franchisees” there to stay during corporate meetings or the like. “I never charged the company a nickel” for any of it.
When asked more broadly whether the wide-ranging allegations were true, he said, “I’m sure there’s some truth to everything.” He added, “You would think it would be really complicated,” the story behind the conflict at Liberty Tax, but he says it’s simple. “In 2017 there were bad results for the company,” he says. “They started out saying it’s my fault.
When I wouldn’t leave, as I resisted blow after blow, they raised the stakes.” Only after Nasdaq threatened to delist the firm did he strike a deal and walk away.
“Did I make mistakes? Yes, for sure. That’s what human beings do,” says John Hewitt, who adds he will now turn his attention to building his new firm, Loyalty Brands.
A new day
Meet the person hired to clean up the turmoil. “It really is a new day at Liberty Tax,” declares Nicole Ossenfort, CEO, during an interview at headquarters in Virginia Beach. The entrance features a giant statue of Lady Liberty, which is also the goofy costume people wear to promote their Liberty Tax offices around the country.
It was October 22, just a few days after Liberty’s annual convention for franchisees, where she noted “a sense of renewal” among the 1,500 attendees. “The reason I am here is because I could make a difference,” she says. “Liberty Tax was life-changing for me. I wanted to be part of that.”
A one-time top-performing franchisee in South Dakota, an operation her husband now runs, Ossenfort remembers the day she became CEO very well: February 19, 2018, when she replaced Edward Brunot, who had been appointed by the board after it ousted Hewitt. Her tenure didn’t start well. The next day the share price plunged more than 17 percent.
Analysts noted the company had fired its second CEO in six months, claimed that Ossenfort had been “handpicked” by Hewitt, and noted that Hewitt would serve in an advisory role and remain chairman of the board, thus continuing to wield his influence.
On February 21, the company announced the resignation of its sole remaining Class A board member, Ross Longfield, who wrote a letter calling Ossenfort and two other new executives “not qualified to hold these positions in a public company and they are all beholden to John Hewitt.”
A no-nonsense executive who speaks in short, controlled sentences, Ossenfort took it in stride and got right to work, using her credibility as a strong operator and inviting other operators to visit company headquarters and share their concerns. The company was getting away from doing things in the interests of the franchisee, she believed. “Decisions need to be made with that mindset,” she says. “I believe if you have happy, successful, profitable franchisees they will grow and flourish and expand.”
Many franchisees told her they were buoyed upon her appointment. “The franchisees had been through a lot over the course of the 12 months or so. It gave the franchisee base hope.”
She lists a number of initiatives put in place that she believes will move Liberty Tax in the right direction: a cloud-based tax prep software package and other investments in technology; new marketing programs; a new director of customer experience at corporate. She counts the fact that Andrew Laurence of Vintage Capital, the new board chair since August 2018, backs her as CEO as a vote of confidence.
But there is a big hill to climb. She remembers the glory days of Liberty Tax, when it was the fastest franchise to get to 4,000 offices; that number sank from 4,077 units in fiscal 2017 to 3,610 for fiscal 2018, and systemwide sales declined by 12 percent during that time to $386 million. Meanwhile competitor H&R Block lost 0.9 percent in systemwide sales but Jackson Hewitt posted a 23.6 percent increase, according to the Franchise Times Top 200+.
Her goal is for 5 million customers to choose Liberty Tax for their tax preparation by 2025; today that number is 2 million, and when I say that’s ambitious, she replies with a characteristically short single word: “Indeed.”
She says many people in the company admire Hewitt and added he served as a mentor for multiple franchisees. “He was a mentor for me as well.” Do people miss him? “I think change is hard for people,” she says. Does she miss him? “I don’t miss the turmoil.”
As for what she thinks now that John Hewitt is starting a new tax preparation service, she’s done talking about that subject. “I have enough to focus on without worrying about what other people are doing,” she says. “I respect John and I wish him the most success. I’m focused on the here and now and the opportunities at this company.”
‘I come to play’
Earlier, at the office tower for Loyalty Brands, Hewitt and Martha O’Gorman detailed some of their plans for their new company. O’Gorman was with Hewitt at Jackson Hewitt, and she joined him to launch Liberty Tax, too, where she served as chief marketing officer until being fired in early October. O’Gorman said she was too closely tied to Hewitt to remain at the company after he sold his shares.
O’Gorman doesn’t think the bad press about Hewitt has gained much traction beyond Virginia Beach. “We sit in the cesspool of bad publicity in this market,” but most don’t pay attention, she believes. “It’s a one-reporter thing,” she says, referring to the Virginian-Pilot reporter who broke the sex scandal story in November 2017 after obtaining an internal investigation report.
The plans are for four concepts: a business brokerage franchise called First Choice; a “high-end” franchise to provide bookkeeping, accounting and tax services to small businesses and high net worth clients; a barter organization, in which businesses provide their excess capacity to trade for other needed services; and the new retail tax service, scheduled to be launched the day after Hewitt’s non-compete expires. He plans to focus on the Hispanic market, he says, something he tried at Liberty by launching SiempreTax in 2014.
I asked O’Gorman why she joined Hewitt to help him start over. “Why not?” she says, adding she helped him to start Liberty Tax, too. “It was so much fun. I got so energized, and seeing the potential, I’m excited to be able to do it again.”
Hewitt, too, is confident he will succeed. I asked if his reputation would hurt him in launching a new franchise company. “My reputation is, I’ve been assassinated. The proof is in the pudding,” he says. “As I go around the world and meet people, they say that’s a bunch of hooey. That’s not substantive.” Besides, he says, “Bad publicity fades as time goes by.”
Asked if he regrets losing his two companies, he begins to make a series of odd comparisons. “My priorities are God, family, business,” in that order, he declares. People say it must be tough to lose your business, “your baby,” but he thinks it’s relative. If they said, your son could lose a leg or you could lose your business, “of course, take my business.” If they said, “your son could get leukemia” or you could lose your business, of course, “take my business. It’s not the worst thing that could happen,” he says, and brushes it off when I point out the obvious, that he did not have to select between such dire choices.
Is there anything he regrets about what happened at Liberty Tax? “I don’t look back. I try never to think about it because it’s a waste of my time. Did I make mistakes? Yes, for sure.
That’s what human beings do. If you’re not making mistakes you’re not doing anything,” he says, adding, “there isn’t a day where I don’t wake up happy” and go to bed happy.
“Lots of crap happens in between.”
And he’s more than ready for attempt No. 3. “We felt blessed to be with Liberty Tax. We had great years. I can guarantee you that Loyalty is going to do the same thing to Jackson Hewitt, Liberty Tax and H&R Block. We’re going to beat them up,” he says. “I come to play.”