H&R Block Jumps into SaaS with Wave Financial Acquisition

The convergence of traditional and cloud account continued today with H&R Block’s C$537 million ($US405 million) acquisition of Wave, a Toronto-based SMB-focused cloud accounting software company with an estimated 400,000 customers and annual revenues of C$50 million ($US38 million).

At last week’s LOCALOGY:ENGAGE conference in Washington DC, a panel of investment bankers and strategic buyers noted how strategic buyers are willing to pay well for well-run SMB businesses that fit a strategic need.

And Wave isn’t a fly-by-night app launched just to be acquired. The company was launched back in 2010 with eight employees in a Toronto co-working space by entrepreneurs Kirk Simpson and James Lochrie. Wave has grown to more than 250 employees today. And it has grown well beyond offering online accounting software to a more complete solution with invoicing, payroll and expense management.

Both sides get something out of this deal (beyond the healthy exit for Wave’s founders). H&R block adds capabilities to help level the playing field with its archrival Intuit. Wave gets access to H&R Blocks resources and massive retail network.

“This is a great deal for both sides. H & R Block accesses their growth engine (over 90% of Wave’s web traffic is organic). Wave accesses a huge, established partner to accelerate distribution and give their customers a complete accounting and tax solution,” said Mark MacLeod, Founder of SurePath Captial Partners.

And LSA advisor Neal Polachek points out, “Visiting H&R Block to get your taxes done is an episodic event, while what Wave offers delivers value year-round. This the deal will push HR into an ongoing role, making it more mission-critical for small businesses.”

One of Wave’s bigger recent moves was the launch last year of Wave Plus, a “VIP” service that includes access to in house accountants and business coaches. MacLeod predicts H&R Block may incorporate this somehow into its retail network to give it more of a year-round value proposition.

According to Wave board member Peter Misek, quoted in the Toronto Globe & Mail, the price reflects a new normal for exit multiples.

“Exits [valuing firms] at $50 million to $100 million were the norm in Canada in the early 2000s and $100 million to $200 million earlier this decade,” said Misek told the Mail. “For the successful companies now in Canada, $500 million-plus is what entrepreneurs and venture capitalists are shooting for.”

H&R Block has long been under pressure to make an acquisition like this. As noted, its biggest competitor Intuit already has a year-round package of solutions for SMBs with TurboTax and QuickBooks. H&R has tried to compete with Intuit via its partnership with Xero, but that deal hasn’t done enough to level the playing field.

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