Special Report

Breaking down the $537-million H&R Block acquisition of Toronto fintech Wave

Caption: Wave CEO Kirk Simpson, centre, celebrating at the company's holiday party. Kirk Simpson (Twitter)
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What’s new: Tax services giant H&R Block has entered into an agreement to buy Wave Financial, a digital accounting services firm with over 400,000 small business clients, for $537 million (US$405 million) in cash.

What’s in it for H&R Block: New revenue streams. Kansas City, Mo.-based H&R Block processed 23 million tax returns in fiscal 2019, bringing in $3.1 billion in revenue. Wave offers a suite of products for small businesses, including payroll, invoicing, bookkeeping and credit card processing. This will allow H&R Block to compete with banks and accounting firms, while offering complementary accounting products like Intuit—which makes QuickBooks and TurboTax, software for bookkeeping and tax filing, respectively—does.

What’s in it for Wave: Access to H&R Block’s customer base and global scale. Wave has about 260 employees, nearly all in Toronto. H&R Block has 70,000 tax professionals and 11,000 retail tax offices in the U.S., Canada, Australia and India. Adding that service helps Wave address a long-standing concern for its customer base. “If you’re a small-business owner, when tax is due, you’ve got weeks of stress, generally, to make sure that you’re in good shape,” Kirk Simpson, Wave co-founder and CEO, told The Logic shortly after the term sheet was signed.

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How the deal came together: Simpson went out to raise another round in the fall of 2018, and started talking to H&R Block CEO Jeff Jones about investing in Wave and forming a commercial partnership. Simpson said conversations with customers about their tax-filing pain points showed him that integrating that service with accounting and payments could be valuable to users. “We got excited about the possibilities,” he said. “Later, here we are.”

Who wins: Early employees and investors get a big payday on a strong valuation. A source close to the company told The Logic that, as of May, Wave had an annual run rate of over $50 million in revenue. The sale price of US$405 million is over 10 times current-year revenue based on Monday’s exchange rate, a multiple that’s just below the 11-times multiple benchmark for emerging cloud companies compiled by the Bessemer Cloud Index, which tracks public companies that work in the space. The deal is expected to close in the next few months.

What this means for investors: Wave has raised about $80 million from 13 investors since it was founded in 2010. Lead investors include large Canadian investors OMERS Ventures and BDC Capital Corporation, as well as U.S-based venture funds CRV and Social Capital. Most recently, National Australia Bank Ventures led Wave’s $32-million May 2017 Series D.

What this means for customers: Wave will continue to operate as a standalone company, so the platform isn’t going anywhere. Simpson wants to add tax offerings for Wave customers and make his financial services available to small businesses using H&R Block. “To be able to go from invoicing and payments to bookkeeping and payroll all the way into tax on a single platform … is really, really compelling,” said Simpson.

Wave’s CEO on what the exit means for Canadian tech: Simpson acknowledged the frequently-cited concern that there aren’t enough scaleups in Canada. But he said large-scale exits also help the tech ecosystem.“We’ve had a great return for early angels and the V.C. community, as well as early employees,” he said. “And we’re really proud of that. The opportunity now is for all of that capital to go and be reinvested in the next round of startup and scale-up companies.”

What this means for Toronto: Wave stays in the city. Simpson and the rest of the leadership team are staying on with Simpson reporting directly to Jones. No employees will be laid off and the firm intends to hire in Toronto, where nearly all its employees are based, said Simpson.