{"id":2803,"date":"2016-01-11T06:00:23","date_gmt":"2016-01-11T14:00:23","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=2803"},"modified":"2019-07-01T15:34:14","modified_gmt":"2019-07-01T22:34:14","slug":"lessons-from-liberty-tax-service-part-1","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/lessons-from-liberty-tax-service-part-1\/","title":{"rendered":"Lessons from Liberty Tax Service, Part 1"},"content":{"rendered":"

\"Picture<\/a>A few weeks back, I attended a presentation for people interested in becoming Liberty Tax franchisees.<\/p>\n

A friend was thinking about the franchise, and he convinced me to tag along. He wanted a wingman.<\/p>\n

Over the days that followed the presentation by the Liberty Tax folks, I\u2019ve pondered some of the stuff that seemed really impressive about their franchise model\u2014and then some stuff that seemed, well, problematic too. So I\u2019m going to share my thoughts in two posts.<\/p>\n

In this first post, I\u2019m going to point out what I see as the three biggest advantages or positives to a franchise model like Liberty Tax\u2019s. In the next post, I\u2019m going to highlight three negatives people interested in a franchise-type opportunity need to be alert to.<\/p>\n

Franchisor Positive #1: Better Product Design<\/h2>\n

The first thing that jumps out at you if you look closely at a franchise model? Well, if you understand the industry in which the franchisor and franchisees operate, you see that these guys do a way better job of designing profitable products and services than their non-franchise competitors.<\/p>\n

Now you need to take what I\u2019m about to share with grain a salt. And I\u2019m going to round the numbers a bit anyway to make this discussion easier to understand. But essentially the gross profit margins enjoyed by Liberty Tax franchisees work like this.<\/p>\n

A typical tax return might cost $300. But that return requires maybe an hour or less of a $20-an-hour employee. Some taxpayer walks in, waits, sits for a half an hour with a return preparer, then pays, electronically files, and walks out.<\/p>\n

Here\u2019s what\u2019s remarkable about this process. This efficiency and the pricing means that before paying the franchise fee, the franchisee earns about $280 of gross margin on the $300 product. That\u2019s nearly an 95% gross profit margin. Wow.<\/p>\n

Note:<\/strong> Remember that the owner still needs to pay all the other overhead costs of running the business, including rent, franchise royalties, furniture and equipment, utilities and advertising\u2026 and that only the amount leftover after all of this stuff becomes profit to the owner.<\/p>\n

I don\u2019t want to go off on a tangent and talk about gross profit margins on the products and services a CPA firm delivers. But I do not think most small CPA firms (which are sort of comparable to a successful retail tax preparation franchise) enjoy margins anywhere close to this.<\/p>\n

In fact, I would guess an apples-to-apples accounting would show our gross profit margins are closer to 40%. We deliver a different and more customized product with many more hours of much more costly labor baked into the return.<\/p>\n

To their great credit, however, Liberty Tax and the other national tax preparation firms, too, have designed a simple, fast process that employs modestly paid\u00a0seasonable employees to do the lion\u2019s share of rather standardized, cookie-cutter work. It\u2019s brilliant.<\/p>\n

Franchisor Positive #2: Identifying Best Practices<\/h2>\n

You know something else that really stood out in the Liberty Tax presentation to prospective franchisees? The franchisor has truly developed a best-practices approach to running a retail tax-preparation office.<\/p>\n

No, I really mean it. The franchisor has, through experience and experimentation, collected and codified systems and procedures that optimize results. Furthermore, these systems and procedures appropriately support the franchise strategy of preparing tax returns for low- and middle-income taxpayers.<\/p>\n

A quick example of such a procedure… So a big problem with any tax-preparation business is recruiting quality staff and getting them trained. But you know what Liberty does to solve both challenges? Liberty flip-flopped the steps. They offer a free tax class to train people,\u00a0and then they recruit the best students from their classes.<\/p>\n

And this isn\u2019t the only clever system or procedure they\u2019ve developed. Probably they\u2019ve got dozens of such tactics.<\/p>\n

Franchisees who follow these tactics should find their operation running more smoothly and more efficiently and with fewer problems. Clever, right?<\/p>\n

Franchisor Positive #3: Big Data Insights<\/h2>\n

Let me quickly mention one other positive that Liberty Tax indirectly highlighted in their presentation.<\/p>\n

A franchisor such as\u00a0Liberty Tax can, and actually does, use its big data resources to help franchisees better manage their operations. And let me give you the most obvious example of this from the presentation.<\/p>\n

During one\u00a0session, David Tarr, the Liberty director of franchise development, mentioned a couple of things.<\/p>\n

First, that most of the profits and a huge chunk of the business occur over a roughly three-and-a-half-week period of time that starts when employees receive their W-2s. So that\u2019s pretty interesting.<\/p>\n

Note:<\/strong> Liberty even knows which day of the year you\u2019ll be busiest. (I think they said the fifth Monday of tax season.)<\/p>\n

But here\u2019s a second thing Tarr mentioned\u2014and it\u2019s more interesting. For a new franchisee, Liberty can look at the small number of tax returns the franchise does for a few days in, say, the third week of January and accurately forecast the number of tax returns the franchise will prepare each day over the three-and-a-half-week \u201csuper-busy season.\u201d<\/p>\n

For example, if you\u2019re a new franchiser and you tell Liberty that you did three returns a day on the Monday, Tuesday and Wednesday of the third week in January, they can apparently accurately estimate that you\u2019ll do, like, twenty returns a day for the first half of February.<\/p>\n

That\u2019s not just a parlor magic trick. That\u2019s forecasting ability. Big data from thousands of similar retail tax-preparation offices and millions of tax returns let them help you appropriately plan. Wow. That is cool. And a huge advantage for the small-business owners and entrepreneurs using their franchise program. It\u2019s beautiful.<\/p>\n

Comments and Takeaway<\/h2>\n

Two quick comments and a caveat to wrap this up\u2026<\/p>\n

First, even if you and I don\u2019t ever want to have anything to do with a franchise business, we want to emulate them when it comes to their smart design of profitable products and their obsessive approach to identifying and implementing best practices. We small-business folks can admit this, right? We all need to be more like the franchisors in these areas.<\/p>\n

Note:<\/strong> This point about emulating successful franchise business models is made and elaborated upon in Michael Gerber\u2019s classic, \u201cThe E-Myth.\u201d<\/p>\n

Second, the one advantage a big franchisor will always have is its\u00a0access to and use of big data. Small-business folks can\u2019t do this obviously. But I would suggest that we can mitigate our disadvantage by operating good information systems. (For example, by having and using a good accounting system.)<\/p>\n

And a final caveat to wrap up this post. If you are seriously considering investing in a franchise, you want to understand that the positives described in this blog post are not the entire story. The franchise model also comes with some negatives, something I\u2019ll describe in my next post about the Liberty Tax business model<\/a>.<\/p>\n

\n

Are You a Small-Business Owner Looking to Reduce Taxes?<\/h2>\n

\"\"Small business owners often don\u2019t do a good job with\u00a0maximizing their legitimate tax deductions\u2014with\u00a0structuring their operations to protect legitimate deductions, with creating new deductions and with recycling (or double-deducting) the deductions which can be used more than once.<\/p>\n

Which is too bad. Getting organized\u00a0in these areas\u00a0can save business owners a bundle.<\/p>\n

If after hearing this, you\u2019re thinking maybe you can do a better job with your tax deductions, consider downloading\u00a0our $40 ebook, Small Businesses Tax Deduction Secrets<\/em>.<\/p>\n

This 70-page ebook\u00a0provides detailed instructions\u00a0about how you can\u00a0annually save thousands of dollars in income and related taxes simply by more effectively using legitimate small business tax deductions. Interested in more information? Click here<\/a>.<\/p>\n