TA Sidles Up To The Tax Man –

The old adage says there are only two things in life that are guaranteed-death and taxes. For TA Associates, the hope is that profits from its latest investment prove to be just as unavoidable.

The Boston-based private equity firm, late last month, completed the $85 million recapitalization, and subsequent majority-stake acquisition, of Cedar Rapids, Iowa-based 2nd Story Software Inc., a provider of online tax preparation software and electronic filing services. The company’s previous owners will maintain a significant minority interest in the company.

TA had been eyeing the electronic tax filing market for a few years and first contacted 2nd Story in the middle of 2002, TA Principal Todd Crockett told Buyouts. “We had read data about how the IRS was hoping to increase the amount of individual e-filers to 70% by the year 2007,” Crockett said. In 2002, only 30% to 40% of individuals were filing their taxes electronically. Today, the number of e-filers has grown to about 50%, or about 65.5 million individuals, Crockett said.

TA provided equity for the recapitalization from its $2 billion vintage-2000 TA IX LP fund and from TA Atlantic & Pacific IV LP, an investment vehicle that raised a total of $500 million before closing in 1999, Crockett said.

To finance the deal, a tranche of senior debt was provided by Wells Fargo Foothill Inc. and DB Zwirn & Co. LP. Crockett declined to disclose the amount of debt, saying only that it was a “nominal amount relative to the total recap.”

2nd Story’s flagship product line, TaxACT, was introduced in 1998. The online company provides free, downloadable versions of TaxACT that offer the nuts and bolts in tax needs as well as deluxe and state versions of the product that are available to paying customers. “They’ve really been innovative pioneers in the tax market because all their competitors are wed to the retail market,” Crockett said.

To grow 2nd Story, TA will not immediately look for add-on acquisitions, focusing instead on the company’s organic opportunities. “As the market for this software continues to grow, we plan on building that base with new customers and on keeping up the renewal rates of the company’s existing users,” Crockett said.

Crockett added: “It’s very hard for H&R Block and TurboTax to compete because they’re stuck at these very high price points. As the world continues to move to the Internet, it will be very difficult for them to attract more customers because web-based software like TaxACT comes at a much lower price point.”

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