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Two Fractional CFOs Chat: The Balance between Maximizing Value and Minimizing Taxes with Byron Wolfe · Built by Margin with Laurie Chen

• 0:04
  Welcome to Built by Margin, the podcast where strategy meets the spreadsheet. I'm your host, Laurie Chen, fractional CFO and tax strategist, here to help you make smarter financial decisions, build a profitable business, and keep more of what you earn. Let's dive into the numbers that actually move the needle. Hey everyone, welcome to Built by Margin, the show where we talk about what really drives business growth, from cashflow to financial strategy. I'm your host, Laurie Chen, here to cut through the noise and get straight to the financial heart of Scaling Smart.
• 0:42
  Today, I'm excited to sit down with Byron Wolfe, a fractional CFO and tax strategist who built his advisory firm, the CFOAF, based in Phoenix, Arizona. Byron, welcome to the show. How So CFO AF, the AF stands for exactly what you think it means. We like it. It really does kind of eliminate some people and it is definitely what we're about, right? So we're not your traditional tax strategy firm, fractional CFO firm that's just trying to get through and just doing the bare minimum. We're really about making a huge impact on the bottom line. And we will 100% put our reputation on the line to make that happen. So while a lot of CPAs are just trying to protect their license and they're just trying to get along and play nice with the IRS, we're here to be very serious about getting that tax liability as low as it can possibly get. And we're very aggressive in that aspect. The CFO part is it's I've been a CFO, I am a CPA, but being a CFO definitely gives me insights into tax strategy that I think a lot of CPAs or tax strategists really don't have. They haven't been there, done that. There's a pretty famous guy that said he does not take any advice from somebody that hasn't been there, done that, or where he's trying to go. So his business partner, Grant Cardone, Brandon. And he said, why would I take advice from somebody about getting to $100 million that's never been to $100 million? And I like that. So from a tech strategy perspective, I feel like we have an insight that a lot of people don't have because I've owned a lot of businesses. I've built businesses, scaled them, sold them. I've had failures on the way. I probably have more business failures than I have wins. It's amazing how much you will learn from a business failure over a business win. The failures really teach you way more than the wins. The wins are way more enjoyable, of course, but you learn a lot from things that don't go well, and you learn what not to do. So I take that CFO piece into the strategy, and I feel like I'm able to to reduce them in the strategy, but at the same time help them to create an environment that increases their profitability, gives them better insight on what those expenses are, how those expenses affect their company, so that while they're increasing that revenue, they're doing it strategically and in a profitable or more profitable Okay, and how long have you had your firm and what types of businesses are you working with?
• 3:26
  So we work with startups, but we do establish businesses. Our sweet spot is in that $5 million to $50 million range. We have taken some that are below the $5 billion if it really makes sense to do so or if they're in a high-profitability industry.
• 3:45
  That's really the sweet spot. At $5 million to $50 million, we can have a tremendous impact. They're growing their company. They're not necessarily ready for a full-time CFO that's really driving strategy, driving the growth. driving the profitability, so we can come in, make a big impact for them, be a high return on the dollars they've invested with our firm. So that's kind of our target. Industry-wise, we're pretty wide open.
• 4:10
  We don't really do not-for-profits, although we've advised on some not-for-profits. But from a tax strategy perspective, it's all zero, so it's hard to come in at that. But we do kind of look at those. It's just not something we normally work with. We do really well in the service industry. So those have been a huge impact for us. But, you know, and we've got them all the way across. I mean, we've got, you know, companies that work in the metaverse, NFT, crypto space, all the way to insurance companies, construction firms, like you name it.
• 4:45
  So, you know, we've done really well for all of those, mainly because we're the expert on the CFO and the tech strategy side, and they need to be the expert in the industry that they're in, right?
• 4:56
  And so we capitalize on that combo pack. How long we've been in business. I've been a CPA since 2008, 2009. So I've been doing this a long time, but CFO AF is actually in our fourth year, third full year, fourth year of being a tax strategy firm. So fairly new to the game, but I've been doing this a long time and I've been a CFO for even longer.
• 5:25
  So with your clients, do you offer them both the fractional CFO and the tax strategy piece, or do you just do one? It depends on Yeah, 100% depends on the client. We have a lot more tax strategy clients than we have fractional CFO clients. I love the fractional CFO space. I know you love it as well. And it can have a tremendous impact. But we have really capitalized on the tax strategy side. And it's been a huge growth for us. It's also a great place to come in and show an immediate impact for potential clients. So when we start to talk about what's going on with the business and where they're at, things of that nature, the first thing that generally comes up is I'm paying a bunch of money in taxes. So tax strategy allows us to come in, reduce that significantly or hopefully down to zero by making those strategic decisions. And that shows that immediate value so that they build a level of trust with us that I think is so important for anybody that's going to be a piece of your organization. Fractional CFOs, they are intimately involved. And I think there's a disconnect. I'd love to hear your opinion on this. People say, well, it's fractional. They don't care about the business like somebody internal would.
• 6:45
  And I just disagree with that. I think that it's very intimate. as a fractional CFO, like you need to understand the company, you need to understand the owners, like to really have the impact, you have to kind of live and breathe within that organization and have an amazing understanding of what's going on. But Yeah, I absolutely agree with that, at least for the if you're a good fractional CFO, then you should be intimately involved with the finances. Because the way I see it is you're being paid as a contractor, but you should actually see yourself as an employee in terms of commitment level, because you have to understand their finances. So to a level to where you can help them strategize about where they're going, you have to understand what their long term goals are, what their short term goals are. And that doesn't happen overnight, and it doesn't happen even in a month's time. You know, we're talking about long term strategic planning, understanding FP&A, understanding all the ins and outs of the accounting function and what's messed up there. Maybe their systems are completely wrong, right? They don't have the right systems. Everything is manual. You've got to understand that from the ground up. And so it's about the level of commitment, the level of insight that you have into everything that's running in the background so that you can inform the strategic direction No, I agree with that. And I love what you said. Like, it's not an immediate, you're not going to have a 30 day window. I don't know kind of how you jump into it. But I always, you know, when we have this conversation, I say, look, it's this is a six month limit. You know, if you're looking for something in 30 days, 60 days, you can move the needle in 30, 60 days, but it's going to cost you a more in the long term to move the needle in such a short period of time that you're honestly going to do more damage than you are good in that short window. So making it a six month, I think minimum allows you to, like you said, have a really good insight on what's going on. You've got to have that employee mentality. You understand what's happening within the organization. so that you can start to individually pull the levers, right? If you just come in and you change a bunch of stuff, well, you don't really know what the effect is. But if you understand what's happening and now you've identified the levers, you can pull a lever, see kind of how it plays out. Did that have the impact that I thought it did or did it not? Like, okay, so now we understand the effect of that. We go pull the next one. So you can have this incremental changes or improvements that over time have massive, massive impact. You know, I kind of jokingly talk to a lot of the clients and I say, hey, what would a 1% impact in your profitability before you know, and the answers are always a little mixed, but 1% seems very small, but a 1% compounded. impact over time becomes massive. It's that old question, would you rather have a million dollars, or would you rather have a penny a day that doubles every day? Obviously, it's a penny a day that doubles, because that just The compounding effect of that is huge. So I love that you said that it can't happen overnight. You're not going to come in and just change the world in 30 days or two weeks or honestly even two months. I really do believe, I think it's a six-month minimum. Now, I don't know what your opinion is, but I think in six months we should have an impact, right?
• 10:15
  Yeah. The first 90 days, as in any new job, you're coming in as a new employee, the first 90 days are critical, right? But I would agree, you're probably going to see better results in 180 days, right, as a fractional CFO, because probably the first 90 days is more like ramp up and understanding the systems. And then and then it's like, then you focus on the next phase, which is implementation, tweaking, pulling the levers, you know, reaping the benefits of all that set up in the first 90 days. And I also think a big part of being a fractional CFO is building that relationship with management, with the CEO, with the operations team, to get them to think in a different way, right, about their financials and where they're going. So I think building that relationship is also a key piece of what the fractional CFO does. It's not just delivering a service, delivering values, because the accounting is all done by the accountant, the bookkeeper or whoever, right? But as a CFO, it's about building relationships and keeping accountability, helping the team be accountable to the financial goals that they set for their long Yeah, yeah, 100% because you can't do it all by yourself, right?
• 11:31
  And even if you could, that's not sustainable. So, you know, as a fractional CFO, like coming in and setting those and kind of creating those processes, those improvements, all those things, like it has to be embraced by the company, because in reality, like they need to be able to sustain that. Like, you know, we probably share this opinion, but a fractional CFO isn't forever. A fractional CFO helps you to kind of get to the next level and kind of build your orientation out where either, you know, you've got the systems in place and everything is exactly where you need it to be so that you can kind of manage that from, you know, with somebody just coming out of an outside. Or you get to the growth place where bringing in a true CFO or in-house CFO CFO makes financial sense, and that person can take over what was done by the fractional CFO and really compound that in a day-by-day impact. I don't think that as fractional CFOs, we should be in it for forever. We should be creating the things that are essentially going to replace Um, replace ourselves, right? In all employees, every employee you hire, it's your business. Like if they're still doing on day 5,000, what they were doing on day one, they haven't improved. Like they're not really a benefit to you. That employee should be growing out of whatever that role is. They should be training the person that's going to come in behind them.
• 13:02
  And then they step up into the next role and kind of do the same thing. So, I think as fractional CFOs, it's on us to produce those results, but also to create the framework for the SOPs so that the company can continue to grow, continue to get that benefit, and hopefully at some point replace that fractional with a full-time that can step in and just really run with what was created. but it shouldn't be dependent, right? It shouldn't be, you know, as soon as you step out, the whole thing just crumbles. You know, it's our job to really kind of set that up. And again, it comes back to, we can't do it in 30 days. You know, it's a, that's a long-term play.
• 13:40
  So it takes time to create that, that can support the entity or the company for a long time in the future. And you should reap those benefits, you know, year Yeah. And for me, so my clientele, I work a lot with startups. And so one of the biggest goals that startups has is raising, raising money, right, raising that seed round, series A, series B, and then getting acquired exiting. So that piece is also very key for the clients that I work with, is understanding what do we need to do to maximize our valuation, so that we can raise Raise that next series a funding at the maximum valuation that we can get right so a lot of it is also very industry specific is understanding what their goals Yeah, no, I agree. And I love that you brought that up, because this is exactly where strategy and CFO tend to butt heads. Right. So the tax strategist is trying to get the minimum taxes possible, which a lot of times creates no profit. Right. So we're going to get the profit all the way down. We're not going to pay any taxes. Right. I think it's a little lazy. Like there's other ways to do it. Profit's still up. She's trying to get it down. But, you know, we're trying to get the lowest amount of taxes possible. When you're looking on selling, being the most best-looking business acquisition or exiting the company, you want the highest profit. You want to be the healthiest you can possibly be so that you get that high-level multiplier. And so this is exactly where I love the fact that they're being combined. As a fractional CFO and a tax strategist, you and I both have that insight to be able to see both sides of the equation. So hey, we need to get the taxes down, but we can't sacrifice over here on the tax strategy for what the value of the company looks like. I see so many people that we get into, what's your tax strategy been so far? Well, my CPA or my tax guy or my tax girl, they just say, we did not make any money. Write off everything, don't make any money. And I'm like, yeah, but your company looks like it doesn't do anything. You don't look profitable. You can't get a loan. Nobody's going to buy you because it looks like you don't make any money. I said, that's just counterproductive. So I love that you said that, because that's really where it's like a, I don't want to say like dynamic duo, but like having both insights, it's such a huge deal for a company. And while some people say I'm never going to exit, we all know that's not true. Everybody should be aware of the exit or the potential exit, because if you're ready for the best exit, you probably are operating at the highest level of profitability and efficiency possible. So even if you keep it forever, yeah, you're Yeah, I mean, so much of exits is measured by, you know, 3x EBITDA, you know, whatever that multiple is, right? So you're trying to maximize the purchase price of your company. And so, yeah, so that there's a tension between maximizing valuation and implementing tax strategy in a way that minimizes your cash outflow at the end of the year. Can you walk us through a real example of a tax strategy that saved a client So there's a ton of them. A lot of people are aware of, say, the Augusta rule. The Augusta rule is a fantastic tax strategy. It started because of the masters that takes place in Augusta, Georgia. People were renting their homes for a much higher rental rate than was probably reasonable for the size of their home or the rentals in the area because of the golf tournament. So the IRS stepped in and said, hey, we're going to allow this. We're just not even going to make it taxable, which was fantastic at the time. So the Augusta rule allows anybody, not just people that live in Augusta, Georgia, right? Anybody can rent their home for 14 days tax free. And the beauty of the Augusta is that it allows you to go with that high-end rental. You're not just looking at, okay, what's an Airbnb similar in my area at the worst time of the year? You're looking at not insanely high. You can say, well, it's $10,000 a day. That's not probably reasonable unless you live in just an insane home. But for most of us, it can be a little higher. So the day rate, maybe at a hotel, or kind of the higher end of what it would cost to rent that. So that your business is utilizing your home for whatever, staff meetings, staff appreciation events, monthly planning, quarterly planning, annual review, whatever.
• 18:32
  It's kind of a business thing. It can even be like a business retreat, or it can be like an employee appreciation event. But you get 14 days at that high daily rate that the business gets to take as a write-off. It's an expense because they're paying rent back to you, the owner of the house or the owner of the company usually, or one of the owners. So you get that 14 days tax-free. But whatever that amount is, let's say $1,000 a day, that $14,000 goes from the business to you, $14,000 tax-free, but you get the $14,000 write-off on your business. So again, it's a big impact. It's really, really good, especially for new business owners that are maybe they're profiting $100,000, $200,000, which is fantastic. I don't want to take away from that. But you're not talking millions and billions. But that $14,000 makes a tremendous impact at that range. So that one's really good. Home office, so many people, they use a simplified method, which is going to cap out at $1,500. Let's be real, home prices have been going crazy for a while and it feels like everything's more expensive. So the idea that a home office caps at $1,500 is ridiculous to me. Because anytime you use the standard method and actually calculate it, It's always, I won't say always, I haven't seen a situation where it's not above $1,500. And I've seen these things in the $10,000, $15,000. So it's a great one to take advantage of that is definitely a strategy item. Can a tax accountant or somebody that's just junior taxes do it? Yeah, 100%. But it takes time, it takes effort, it takes documentation. And so if you're just paying somebody for prep and file, they're probably not going to do it because it's an extra step, extra bit of time on them, extra back and forth that they're not really making any money on, right? So they're probably just going to go with a simple plan. So I love the home office. It's a great way to save a ton of money there. Hiring your kids is a great strategy to have kids that are in the home. They're dependents. You can pay them up to the standard deduction. That's essentially free money. So it's really just changing in how you spend it. So I had a client. They're like, oh, I wouldn't do that. My kid would just blow it on Fortnite skins, which is a video game that's online. You can buy little outfits or whatever. I said, no, I said, you're not giving them $15,000, right? You're essentially transferring $15,000 into an account, you're paying your child, and you're going to use that $15,000, $15,025, so $14,300 last year. You're going to use that $15,000 for things that are related. It has to benefit the child, but school, anything school-related, activities-related, you can easily, easily spend $15,000 on a kid. And then the work just has to be reasonable for their age. You're not going to pay a seven-year-old to do your bookkeeping. That's not reasonable. A seven-year-old can clean up. A seven-year-old can probably file some stuff for you. Maybe they can even answer some phone calls. I don't know. It depends on the kid. That has to be reasonable, but it's a great way. And again, $15,000 a pop. So if you have three kids,$45,000. that becomes tax-free. Under 18, 1099, you don't have to do payroll. Once they turn 18, you got to do payroll. They're going to be filing that zero return, and you will have a little bit of cost in the expense on the payroll fees, the W-2. But again, very minimal for the savings that you're going to have. So these are small, but you can bind all these up. It becomes a much bigger play. Above that, I can get into defined benefits plans or deferred comp. Deferred comp is great. If you know you're going to make this much money and you can't really utilize it, you can't get that money down, put that in a deferred comp plan. Deferred comp, based on your structure, I say defined benefits is one of them. But you can use that to purchase property, do some other things. So it's a great way to save money there. Major purchases, equipment purchases, section 179, section 168 is fantastic. You're allowed to depreciate those. So you can save a lot of money there. I tell a lot of people, in reality, if you have a $20,000 tax liability and you're a business owner, it's not that complicated to take $20,000 and take it to zero. It's just really not. I would argue up to probably 40, pretty simple. So anybody that's paying $20,000 to $40,000 as a small business owner in taxes really should be looking at tax strategies because why would you pay $20,000? You don't have to, $40,000, you don't have to.
• 23:09
  You're paying the IRS is essentially what you're doing when you could be putting it in an asset that is tax deferred and growing for you over I mean, we have a ton of clients that, you know, are making good money. And we're just swapping out that I call it the IRS donation. You know, they swap out that that IRS payment, you know, for purchasing, like you said, assets, you go buy a property, you know, that money, you do a cost segregation study on the property, you get that depreciation built back in. So instead of donating, say, you know, $50,000 to the government, Maybe you take that same 50 with a little bit more, obviously it's not a direct match, but you take a little bit of extra money, use that as a down payment on a rental property, do a cost segregation study on it, and all of a sudden you don't have a tax liability. Seems Yeah, absolutely. So when it comes to assessing your client situation, you know, when you first meet them and are trying to understand the best tax plan for them, have you used software that that can help you with Yeah, we have software that's decent. It's pretty good. But we really kind of created our own way to do it. I will say up front, like AI has become a pretty significant piece of that. The AI does some amazing stuff. My big hesitation with AI is that some of that stuff is personal information. So you got to be a little careful on that. The wide open AI, you want to eliminate anything that's personal data, so it's not out in the realm. But you do have some segmented AI. We have a segmented that's just held, that information goes in, it doesn't go outside, it doesn't go out to the World Wide Web to do the search, it exists within that framework.
• 25:04
  And so that is, that we use that probably more than anything else. And then for some of the more advanced strategies, things of that nature, we will go outside, but you just got to be careful. You know, people's personal information should be, you know, it probably is already shared, right?
• 25:18
  But you don't want to be the one that shares it. So, you know, it's probably out there already, but I don't want to be responsible for getting Yeah, if someone listening wants to find a tax strategist, or perhaps they already have a CPA tax accountant helping them file taxes, what should they be asking their CPA or what should they be looking for if they're looking to transition more to strategy and minimizing their taxes from Yeah, I mean, I think it is a simple question of what was my pre-tax liability and what's my post-tax liability? When you were done with it, what'd you say, right? And I think that anybody that's doing any kind of strategy should be very quickly able to answer that. They should say, yeah, before we applied the strategies, you were looking, it's not gonna be the exact number, but you were looking at roughly a $40,000 tax liability. You did this, this, this, this, and this, and now you've got a $10,000 tax liability. So I saved you $30,000. So we have a Forex guarantee that we utilize with all of our strategies. But it simply says, whatever your strategy is, we're going to guarantee at least a Forex savings on top of that. So in that scenario, it'd be very easy to look at that and say, OK, well, if you saved me $30,000, but it cost me $5,000, well, I came out way ahead. Because you saved me six times what I paid you. My issue with the prep and file is that you're really paying twice. You're paying somebody to do the prep and file, and then you're paying the additional IRS donation on top of it because strategy was not utilized. So I think that's the easy question. What are you saving? It's really what it comes down to. Or you can actually look at your return and you're looking for certain things. The home office is a great example. I use this a lot. I say, hey, go in and look, and let's see what your home office was. Was it $1,500 or less? And if they look at it, they're like, well, it's exactly $1,500. I'm like, OK, well, that's the simplified method. I appreciate the fact that they maxed you out, but that tells me that there's no strategy. No, they didn't ask you your square footage. They didn't ask you what you spend on your office. They didn't ask you how much time you're in there. Was there anything else that went into play on that? Did you buy any furniture, any artwork? Did you buy new computers? If none of that conversation takes place, you probably don't have strategy. And I'm sure you wouldn't be shocked, but I think a lot of our listeners would really resonate with this. But I've talked to tons of people that I say, how often do you talk to your CPA? Well, what do you mean?
• 27:54
  Well, how often did you talk to them? Was it once a month, once a quarter, a couple of times a year? Well, no, they just called me when they were done with my taxes and told me what I owed them.
• 28:05
  How is their strategy in that? So yeah, it's pretty Yeah, and they tell you after the fact, after the April 15th, right, or right on April 15th. I've had clients, you know, got a $60,000 tax bill that they became aware of on tax day, you know, and that's actually from a rather large CPA firm.
• 28:29
  So it wasn't even a small firm. Yeah, that's really interesting. Now, one question I've been asking all my guests is what is one way that you have taken a risk in your business? And do you feel like Yeah, so probably the biggest risk, and you'll resonate with this, I don't know if anybody else will, but probably one of the biggest risks that I ever took was recognizing the fact that I cannot be the face for every single client.
• 29:05
  When I realized that I can't do that, I can't service every single client and continue to grow. And honestly, I'm probably not really benefiting my clients at the maximum level by doing that, because you have so many clients. And so your time just gets just fractioned off.
• 29:22
  Every time you add somebody else in, if you're trying to be the face, you're trying to do everything, your time is fractured. And so like you're not really giving 100% to that client anymore because you had those. So it was a it was a risk for me to bring in people that I felt like they had gone through the training. They understood what I was doing enough that they could represent me to those clients. And I still touch base with pretty much every one of our clients. You know, I try to at least come in. We do a quarterly tax strategy call and then we have, of course, the wrap up. So it's generally minimum five, five touches a year. So I try to be on at least one of those, sometimes two of those. just so that there is space time, but I'm no longer the main person. They have a lead strategist that is their main person. That person, their whole entire job is to understand the client, understand their tax strategy intimately, so that they're making the best decisions for themselves and for their business, and that we're maximizing those tax savings in line with what their needs and desires are. Again, if somebody says, hey, I want to buy a house, next year, and I need to show income, right? And I got to be at this level of income to purchase this size house. Well, you know, we need to make sure that the strategy is really in place. That's kind of like a post strategy, not necessarily like reducing the income, because the income needs to be a certain level. So it needs to be in line with what their desires, what their needs are, not just trying to minimize the taxes to Yeah, that's probably as with the startups trying to maximize their valuation versus lowering their taxes. Right. It's like you have to understand what their long term goals are or short term.
• 31:09
  Yeah. And you know this, but like there's a difference between a P&L and a balance sheet, you know, and so when you're looking at the value of that company, right, like a strong P&L, but a really bad balance sheet. You know, that looks bad. So you have to get them both right for really to be a strong acquisition candidate or to get the maximum value. And, you know, most people don't know this. They don't know what they probably don't know what they are. There's probably people that are listening right now. They're like, what's he talking about? Yeah, the profit and loss statement, P&L, and the balance sheet, balance sheet assets, liabilities, and the equity. Those are very important pieces of paper that a lot of us just, oh, it's just a QuickBooks report or a Xero report, right? But they matter. Those things tell the story of your business from a financial perspective or a number perspective. And if the person you're working with doesn't understand that, you're probably getting P&L and the balance sheet that isn't really an accurate representation of Yeah. Well, great. This has been awesome. I've learned a lot from chatting with you. Are there any things that you would like to share with Yeah, of course. We're pretty easy to find CFOAF. You can go to the website, CFOAF.com on Instagram. I'm old, so I'm a Facebook guy, you know, so if you're on Facebook, that's literally where I'm at. But we're on Instagram, YouTube, all the rest of them. But pretty easy to find us. CFOAF, you know, that's not very commonly heard. It doesn't get mixed up with anybody else.
• 32:56
  Yeah, nationwide. We do some international, but it has to be U.S. based. So we do work with some that share business in Canada and outside of the U.S. But we structure specifically on the U.S. tax code. So we're comfortable, we're familiar with those outside of the U.S. from an international perspective. But we generally work with somebody that's in the additional company or country and OK. Well, it's great having you on, Byron. Everyone go follow the Thanks for tuning in to Built by Margin. If you're ready to turn insights into income, subscribe and join me each week as we break down the numbers behind smart business growth. I'm