Last week's press release announcing that long-time tax compliance company TaxWise had been acquired was no huge surprise. Those of us who watch the vendors that serve our profession were certainly expecting the Rome, GA-based provider to be snapped up by someone. The surprise is here is the who and how much!
The new player, Primus Venture Partners, Inc., a private equity firm headquartered in Cleveland, reportedly paid some $65,000,000 for something less than 100% ownership. (The press release states that "the company's senior management team and founding shareholders will retain an ownership interest ...") OK, it's math time. TaxWise claims 400 employees. Applying a (generous) revenue-per-employee figure of $175,000 gets me to maybe $70,000,000 in revenue. Checking that with generally accepted user counts and average prices puts their revenue lower, but somewhere in the $55 to $65 million dollar range. Allowing that software and EFT fees are fabulously profitable means it's a nice business, but still doesn't get me anywhere near justifying the purchase price. During a telephone conference with Jonathon Dick, a Managing Director at Primus, I asked him about this. His answer was textbook --- "we believe in the company long term", etc. Dick stated that TaxWise has "very strong renewals" and has done very well in attracting users when smaller companies are taken over by Intuit, Thomson, or Wolters Kluwer and that he fully expected the growth to continue.
My take on this is different.
1. Everybody in the tax compliance software business has "very strong renewals". As a matter of fact, I'd place the industry average well north of 85%.
2. The market size is, and has been for over 20 years, relatively stagnant at about 140,000 practice units.
3. The market is extremely price conscious and very adverse to upward price adjustments.
4. The competitors are all offering more integration and TaxWise today has none --- no accounting, no management tools, no content.
So WHY does this deal make sense? From the TaxWise perspective it's pretty easy. Sixty-five million reasons to smile. For the new venture capitalists coming to this market I'm just not sure. I don't see any way for this company to return the "home-run" that so many VCs are seeking. Perhaps they think that in five years they'll be able to cash out under the "greater fool" theory. Time will tell.
The mid-term good news is that TaxWise has a decent product for a fair price and it appears they'll be around for the foreseeable future.