Instant Tax Service. An Interview with CEO Fez Ogbazion.
By Mark Adkins, Business Opportunities Journal. March/April 2009.
Fez Ogbazion is CEO of Instant Tax Service and President and Chief Executive Officer of TCA Financial, LLC. He started his first business, Instant Refund Tax Service, when he was still just a sophomore in college. After selling Instant Refund Tax Service to a Fortune 500 company in 1999, he used the proceeds from the sale to fund a bigger tax service – Instant Tax Service – in 2000. Franchising since 2004, Fez’s company was named the #1 new franchise in America by Entrepreneur magazine in 2008 and 2009. I had the pleasure to speak with Fez about Instant Tax and entrepreneurship. --Mark Adkins
BOJ: What is it about Instant Tax Service that stands out in this crowded field?
Fez: People can get in anywhere between zero and $50,000 dollars. The zero is where we have a program where somebody can opt to work for one of our franchisees and the franchisee says “hey, this guy’s pretty good.” We’ll talk to him and if we feel good about him, we’ll actually loan him the money to get started. In that sense, I think the low cost is what attracts people now. The reason that we’ve been able to be consistently at the top, while others are coming and going, is that once you decide to finance somebody, as everyone knows, it takes two or three years to turn a profit. So you might be able to loan the money to get started, but would you be able to loan the money to sustain past tax season number one. You find that location in November, you go into business in January, there’s no business after April. Who’s going help you pay the rent between May and September to see you into tax season number two? We’ve got lines of credit that we are able to facilitate to our franchisees to help them when they first get started, to get to tax season number two. So it’s the low barrier to enter, it’s the low cost opportunity, and the favorable financing that have allowed us to grow.
BOJ: What about the service itself? Do you differentiate yourselves from others on the consumer side?
Fez: That’s a good question. We generally do the same kind of work as other companies. A tax return is a tax return. Now, the funny thing is that every year, I think its Money Magazine gives a tax return to 40 different accountants and they get 40 different answers. Typically, the tax returns that we get are simple, 1040 tax returns. It’s a blue collar employee who wants to get their money back quickly with an instant tax service. So we offer pretty much the same services. In a lot of markets we’re going up against an H&R Block, for example, that’s been around for 40 plus years. So they’re going to have a better retention and referral business than we will when we first get started. But as you’re there over the years, that can grow as well. But essentially we do the same kind of work.
We differentiate ourselves from all these companies doing the same thing. We’ve noticed that a lot of these tax offices look fairly stale. A lot of times a guy will go in for three months and leave the place, and next year he will go into another place. What we did was decorate our offices, fresh paint, furniture. You have to show the community that you’re here to stay. You’re not just there for one tax season.
BOJ: Do you consider this business recession-resistant?
Fez: You know, you’ve got to get your taxes filed. As unemployment has gone up a little bit, people have asked us “has that affected you guys?” Well you know, if you worked (last year) you’ve got to file your taxes. Last year, our average client got a $3,200 refund. They want to get it back quickly. As long as that’s there, I think our business will be needed.
BOJ: How do most franchisees get financed?
Fez: I got started 16 years ago with credit cards. While we don’t go out there and recommend that people get started on credit cards, I definitely have some franchisees that have. We don’t frown on that. If that’s how I got started 16 years ago, who am I to tell someone that has a dream that they can’t do it the same way. There is no doubt about it, when you look at us as back-to-back Entrepreneur Magazine’s fastest growing franchise, it definitely has to do with the fact that there is low cost to get in. And if you prove yourself and you work for us, we’ll get you financed. We don’t look at credit score. When we finance somebody we just look at the equity. If they can bring that to the table, there’s plenty of markets that we’re not in, so we’ll help that person.
BOJ: In terms of tax prep for the category of blue collar workers who are typically getting a $3,000+ refund, there are so many locations out there from the various firms. Is there room for a lot of new locations?
Fez: There is a lot room. The key is saturation. If I am a solo practitioner and I wanted to go to Dallas, Texas tomorrow and open a tax office, I’m probably not going to make it because I’m not going to get my message out. TV, radio, I can’t afford it because I only have one location. Even if I can, people from all over Dallas will hear it, and they’re not going to drive to our one location. In our case, however, what we’ll do if we decide we want to go to Dallas next year, we’ll go sell 30 franchises in Dallas, all throughout Dallas, which will allow us to go in there and spend what we need to spend. Our formula tells us how much to spend there on marketing. We’ll do that and will generate leads and tax returns that way. So there’s probably 20,000 tax preparers in Dallas, but not too many of them can go spend half a million dollars on media for 8 weeks, January and February, in one market.
BOJ: So you’re pulling business away from these independent solo practitioner types?
Fez: Yes. This is one of the industries that is highly fragmented. Of the 80 million people who go to a tax preparer, H&R Block does about 20%, Jackson-Hewitt is number two with about 4%, so everyone else goes to independents, mom and pops, a bunch of different services. So you have people retiring all the time, you have a guy that’s been doing it for a long time and maybe he only opens on Mondays, Wednesdays and Fridays between 12 and 5. There’s a whole host of reasons. The average H&R Block does a couple thousand returns. It’s truly difficult to do a couple thousand returns in a couple hundred stores in one market without making anybody upset. So, I’m confident when I say that every single one of our customers at one time or another has gone to H&R Block. We’re in the business of taking those customers away with better service, better locations, with different financial products, and with getting the refunds back quicker.
BOJ: Does the use of TurboTax and online tax prep software present an opportunity?
Fez: We’re looking at that as we speak. We’ve got two dot-coms right now that we’re playing with ourselves. Our clientele are low income blue collar wage earners and the dot-com is more of your middle income college graduate who would do their tax return on a computer themselves. There is a degree of complexity for a simple return. So that’s two different clients. There hasn’t been a trend of tax prep software pulling customers away. As a matter of fact, the number of people who go to tax preparers has increased every year. Even last year it increased by 4 or 5 percent, so it is still trending up.
BOJ: Work is seasonal. What do your franchisees do to make a living between April and December?
Fez: That’s what makes the business so appealing. One of our sales slogans when we first started franchising was “what would you do with a 9 month vacation?” You work your butt off January 15 through April 15. You get the rest of the time off. But in all fairness, when they first get started, a franchisee will go to another job April 15 through December 15 to earn a living. They will probably have to do that for a couple years, unless they are a retiree or were able to raise the money other ways. But they will go to work, and when you look at our most successful franchisees today, they all had jobs for the first two or three years. My first 5 years in the business, I had a job, and I was still going to college. I used to literally take the winter quarter off to run the business. Spring quarter would come up and I would go to school or somewhere else until the following tax season came along. Once you’re able to get the business to a certain level, then you can sustain yourself with just the business. That’s truly when the fruits of your labor pay-off. You’ve built the business now to where you don’t have to work year round. We’ll tell you, though, that that 3 months worth of work is really 12 months worth of work all squeezed into those 3 months. It’s a lot of work. Most of our franchisees are men, so we refer to their wives as “tax season widowers.” It’s pretty grueling for that short period of time.
BOJ: Are franchisees owner operators in the sense that they are actually doing the preparation themselves or do they usually leverage themselves with a bunch of employees?
Fez: In our system the most successful franchisees are in there getting their hands dirty, running the offices themselves. We have very few people who don’t, or are not active in their business. Now people will sometimes come to me and say “Fez, I don’t have the freedom to quit my job. I make $100,000 a year and I don’t think you would tell me to quit my $100,000 a year job to start this.” And yes, you’re right, and unless you have a brother, a sister, an aunt or uncle that you trust as much as yourself, and has the work ethic that you do, then don’t do it. It’s asking “can somebody run my business as well as I can?” The majority of the time, the answer is going to be “no.”
BOJ: Who is the ideal candidate? You mentioned that retirees are a nice fit, but tell me what you think of as an ideal candidate?
Fez: Well, because of the low cost to entry, we probably are the franchisor that has the franchisees with the youngest age. Our average age for a franchisee is 36. So our franchisee is a guy maybe who has been in the mortgage business, has tried a couple businesses here and there, with a college degree, is tired of the rat race, has access to $25 to $50 thousand dollars in capital and is willing to go ahead and quit their job, try this for a tax season, go out and get a job somewhere else afterwards, make equal or close to what they were making and try to come back for another tax season, maybe go get another job after that, and then maybe by that third tax season, they’ve got a business that will sustain them for the rest of the year. It’s really a motivated entrepreneur that we’ve been able to attract.
BOJ: Do some end up buying multiple franchises?
Fez: Yes, they do. We don’t recommend buying more than one for the first year. You can buy more than one to protect it, and we’ll give you a development schedule. It’s such a unique business where if you make a mistake, you can’t fix it until the following year. You can compare it to being in the Christmas tree business right before Christmas. If you miss a delivery or you miss a shipment, it’s not like you fix it and wait until January. You have to wait until next November. You’re going to make mistakes your first year. We do our best to train you, but at the same time, that’s why we also like to finance people who have been in the business, because they’ve cut their teeth at somebody else’s location. They’ve made their mistakes, they’ve seen a franchisee make mistakes, and on average they will do better as a first year franchisee compared to somebody who hasn’t.
BOJ: Now between April 15 and January 15 the next year, if somebody does have a letter come back from the IRS or something, do the franchisees need to be there for that person?
Fez: No, we have a pretty elaborate routing system, so when a customer leaves our office, they leave with a bunch of different 800 numbers either on the business card or on their folder with their tax information in it. Or when they come into our store, there’s a 1-800 number, when you call the 1-800 number it will ask you for the nearest zip code and you punch in your zip code and it will go to that office. That office will obviously be closed, and then it will come here to corporate to our call center. Our call center during peak will have 30 people in there. During the off season, we will have 2 or 3 people in there. So they will take their call, and the call center person will email the franchisee with what the situation is or the representative here can also see what their store hours are. The busier offices keep store hours even during the off season. Typically Thursdays or Fridays, noon to 5, that kind of thing. And they will give them that information and that’s how we can take care of the client during the off season.
BOJ: It sounds like the business can be lucrative for someone willing to do the hard work and to roll up their sleeves.
Fez: There are our competitors who use the slogan “Don’t quit your day job, hire somebody else to do it.” I am totally against that. I feel like if this is your business, that’s going to take 110% of what you have to make it work. Having said that, this person making six figures may see themselves possibly getting laid off in a year or two from now and they want to take the necessary steps to protect themselves. Its “hey, you gotta find somebody that’s going to work this the way you work it,” or you’re just throwing good money after bad. So I think we will see that a little bit more. Believe it or not, we’re actually working with our financial backers to try to get more capital to allow more people who have the drive but not necessarily the means to get into business because quite a few of our franchisees, when you look at our top 20, quite a bit of them came into the system that way. They have the hunger, they have always been entrepreneurial, but they just couldn’t get the capital. A tax business is one of the hardest things to finance, because the revenue is seasonal, and a bank wants to see regular cash flow. It’s like “you want me to finance you, but you only make money threee months out of the year? How are you going to make your monthly payments for June, July and August?” So banks don’t like it, but we’ve got the track record and we’ve got revenue year round from franchise sales and that sort of thing. So this actually ends up being an advantage to us because it is a barrier to entry in our business.
BOJ: Do you think the recent negative media coverage on refund anticipation loans will have a negative impact on the business model?
Fez: Here is what the people being critical don’t understand. They have a hard time understanding why someone would pay a bank a fee to borrow their own money when they can wait 10-14 days to get it from the government. Well, that’s just it, you need it right now, and nobody’s willing to loan you the money right now. There are three banks in the industry who say “we know enough about this business where we won’t look at your credit score, we know you don’t have any collateral, but because you need this money, we’ll push that to you.” On a 3,000 dollar refund you’re looking at a hundred dollar fee with no guarantee that it will get paid, because it could get taken by student loans, by bad back taxes, by child support, so there’s a loss ratio there that’s involved with that loan. I think that some people are critical because they don’t know the full extent of the risk in that loan. Having said that, let’s say that the product was to go away. Our business is still a way for people to pay for their tax preparation because if I do a person’s tax return, they don’t have a hundred dollars to pay me to prepare their taxes, so what we do is we deduct it from the proceeds of their refund, so even if the money came back 10 to 14 days from then, we don’t charge any more for a person to get it back in a day than a person who gets it back in 2 weeks. But how does somebody still pay to get their taxes prepared if they don’t have the money to get their taxes prepared? So that product is still needed.
BOJ: What advice do you have for new startups in today’s economy?
Fez: I would say “Hold on, it’s going to be a bumpy ride. Make sure you know what you’re getting into, and make sure you are well capitalized.” Every entrepreneur that I know has reached beyond their grasp at some point. We just have big eyes and we’re stupid when we see an opportunity. It was stupid to start a business when you’re 20 years old in college using credit cards. I didn’t care what kind of advice my parents or other people gave me. I didn’t listen; I just did it. So when you talk about giving an entrepreneur advice, it’s something that will go in one ear and out the other until they’ve fallen and tripped a few times, and then they say “maybe I should listen.” You have to get your butt whooped a few times before that ear starts working. But you know, if it doesn’t make sense in Excel, it’s probably not going to make sense in the real world. I’m shocked at how many people go into business and the business model doesn’t make sense and they go into the business and it fails and they’re probably heart broken and they’ve gone through a lot of pain, and a lot of it could’ve been avoided if there was some planning. I think entrepreneurs tend to be self motivated, keep a lot of stuff internally, and I have found them to be introverts. I don’t feel like going out there and giving advice to people, but there’s nothing wrong with running your idea by two or three people who you know are not going to like it so you hear what they have to say. If you still go do it after listening to all of that, then you’ve got something really, really hot that’s probably going to work. | BOJ