When Henry Bloch packed his bags and drove from Kansas City to New York in October 1955 in his brother's borrowed car, the seeds were planted for an expanding business that would come to dominate America's tax landscape.

Bloch was there to scout out possible locations for the tax return business he and his brother Leon had started several years earlier. He found the right locations, and the 1956 tax season was a success. However, since neither brother wanted to cast off their Kansas City roots, they decided to sell the seven offices to two local CPAs. The buyers wrote a check for $10,000, and agreed to pay 2 percent of future revenues. So began the tax preparation franchise business.

Currently, Block has 10,992 offices, of which 4,471 are franchises and the rest are company-owned, according to spokesman Gene King. "Roughly 40 percent of our office locations are franchise locations," he said.

There are now more than a dozen franchise operators willing to sell their system to entrepreneurs, but the two closest to H&R Block in terms of number of locations and volume of returns were both started by John Hewitt, a former Block regional manager.

Jackson Hewitt, formed in 1982, has 6,800 franchised and company-owned locations throughout the U.S., including 2,800 located in Wal-Mart stores, and more than 400 Sears stores in the U.S. and Puerto Rico.

The benefits of being part of a franchise system have never been clearer, according to Mark Steber, chief tax officer at the major franchiser. "Because of increased regulatory oversight, attracting and retaining a qualified workforce in a competitive environment will be more difficult for the stand-alone office," he said. "There won't be that many qualified preparers. In order to attract and retain qualified preparers, you'll have to offer them a career path, benefits and training. Preparer registration and the new oversight dynamics of the Affordable Care Act will add to the confusion. Preparers that are backed up by a national organization will have an advantage."

"How they deliver their services will make or break a company," he added. "I don't know how a business will train employees and do background checks if it's just a stand-alone company."

The issues will get bigger, according to Steber. "The court ruling against the [Registered Tax Return Preparer] regime was an unexpected snag," he said. "It caught us off guard. But at some point the RTRP -- or something very similar -- will be reinstated. Too many of the big industry players, including the IRS, the professional software developers, the self-prepared software developers, as well as the tax professional organizations, all support it."

"The tax business is one of the few businesses that have a predetermined number of customers," Steber observed. "Over the last 65 years, there have been some small ups and downs, but overall there's been consistent growth. You just have to determine what area you want to play in."

"There's a baseline core group of 145 million -- that's plenty of clients to serve. It's a great business with a proven track record. But there will be a higher barrier to penetration once the rules get reinstated."

Liberty Tax Service has nearly doubled in size since 2008 despite the tough economic times, according to company founder and chief executive John Hewitt. "Since 2008 there are less franchises of every kind, partly a result of the recession and the fact that banks aren't lending to small businesses, so Liberty has succeeded going against a strong headwind that exists for all franchises," he said. "Since 2000, we've gained more tax returns in raw numbers than H&R Block and Jackson Hewitt."

 

'FOLLOW THE YELLOW BRICK ROAD'

Hewitt has a list of 45 reasons to own a franchise, rather than try to go it alone, but the No. 1 reason that he and other franchises cite is a proven system.

"You can take a 15-year-old and send him to the store to buy hamburger meat," he said. "When they get home, they can cook a better hamburger than McDonald's, but no one can make money selling hamburgers the way McDonald's does. We give you a proven system. All you have to do is follow the yellow brick road."

"When you start a business from scratch, you have to have a system," he said. "Tax preparation is a seasonal business. You do 70 percent of your business in just four weeks a year, and that's not much time for training and experimentation."

For those who want a year-round business, Padgett Business Services offers accounting and payroll services in addition to its mainstay, tax preparation for small businesses.

"When April 15 ends, we still have plenty to do," said president and chief operating officer Roger Harris. "The other franchises are retail shops with very seasonal revenue, but because we also do accounting and payroll, we are a 12-month operation."

Not all franchise owners are adept at tax preparation when they begin, according to Harris. "We have two levels of support," he said. "We give normal tax support, where you can call us if you have an issue with a particular client. In addition to that, we have our own tax preparation department. We prepare a franchisee's returns in our corporate office until the franchisee is comfortable that they have the experience to go out and do it. It's part of their ongoing training."

If a franchisee is not already a CPA, attorney or Enrolled Agent, "We strongly suggest that you become an Enrolled Agent," Harris advised.

At least a third of the returns that Padgett prepares are individual taxpayers who want to have a relationship with the same preparer year after year. "We felt if we built our accounting and tax base with our small-business customers, the individual tax returns would find us," he said. "Their returns tend to be more complex than the typical retail return."

 

MORE BENEFITS

Being part of a franchise system does have benefits, agreed Chuck McCabe, president of Peoples Income Tax and The Income Tax School. "They provide brand-name recognition and advertising, and a turnkey system that's proven to be profitable. The negatives are the large upfront franchise fees, and ongoing royalties that eat into profit. A lot of owners don't make much profit unless they have multiple locations."

Although McCabe believes that the RTRP requirements were good and necessary, he doesn't see them being reinstated soon. "If the IRS doesn't win the appeal, the only alternative would be to get authority from Congress," he said. "And right now the leaders of the Senate Finance Committee are busy putting together a tax reform bill. While they mention giving the IRS the authority to regulate preparers within the bill, it will likely take some time before the bill becomes law. They will eventually get the authority, but if it's tied to this bill, it will push the timetable into 2014."

Although initial franchise fees can be significant, startup franchisor Smart Tax does not charge franchise fees.

"Our royalties are also lower," said founder and chief executive Nick Rizzi. "But we prefer to deal only with existing tax preparers. We offer support with marketing and we support the franchisee staff. And when tax season is over, they can close their doors and forward all calls to us. We'll take care of any customer questions that might arise."

Rizzi feels the RTRP regime was a workable solution to the problem of unqualified tax preparers. "It was lunacy to let anyone be called a tax preparer without confirming that they know what they're doing," he said. "Hopefully they will find out a way to get this reinstated. Tax preparers should at least have these minimum qualifications."

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