Shownotes
The firm’s job is to go out and find the right answer to, the best answer. Kurtz Fargo serves emerging growth businesses, with the common thread between those companies being that they are growing rapidly and they need a firm that’s helping them plan and strategize throughout their growth process. Matt Fargo’s firm also serves high-net-worth and ultra-high-net-worth individual clients. It turns out that the planning and the strategy work that is done for a business is very similar to that required to properly serve high-net-worth and ultra-high-net-worth individuals. Unfortunately, most individuals, whether ultra-high-net-worth or not, have never experienced true planning and strategy services with their accounting firm, as most firms, solo practitioner to the Big 4, have not trained their teams to think this way. Kurtz Fargo trains their people to think strategically rather than being purely compliance focused, which is unfortunately where most accounting firms focus all of their time and efforts.
Matt Fargo, Managing Partner at Kurtz Fargo, Serving Emerging Growth Businesses & Ultra-High-Net-Worth Individuals With Solution Based Strategies And Planning
We’re incredibly fortunate with the patient and understanding Matt Fargo of Kurtz Fargo. He’s got a consulting firm with his good friend in Boulder, Colorado. We’re going to talk a little bit about the business and who he serves. Thanks so much for taking the time.
You are welcome.
We started out chatting about the business that you have and the clientele that you serve. Could you dig into that a little bit?
Our business likes to serve emerging growth businesses and that’s a pretty wide range of companies. The common thread between all of those is that they’re growing and they need a firm that’s helping them plan and strategize throughout the process. We also work with individuals that are high net worth and ultra-high net worth. You wouldn’t think there’s a lot of similarities between businesses and individuals, but it turns out that the planning and the strategy of the businesses they want are the exact same thing that high net worth and ultra-high net worth individuals want. The way we’ve taught our people to think, we’ve asked them to think strategically about things and that’s what they deliver to the clients. It’s not always the canned solution, it’s not the obvious solution. We teach our people to think and we teach them to consult. Anytime they’re presented with a problem, their job is to go out and find the right answer, not the answer.
Let’s say for sake of argent, I’m a prototypical client, whether it’s a small business owner or whether it’s high net worth person. There’s a particular process or steps that you take to serve that marketplace. Can you describe a bit of your process when you’re dealing with the entrepreneur in business and then secondarily that high net worth, ultra-high net worth individual?
Let’s give an example of a small startup business. There are always the interesting ones to start out with. In the Boulder community here, there’s quite a few of those in a number of different industries, but a lot of times the first time we’re brought into the engagement is by their law firm and the law firm or their accelerator that they come to us and say, “We’ve got this company and they’re just getting started. What’s the right organizational structure for them?” There’s C-Corp, we got S-Corp, we got LLC. a lot of people will throw an answer on that, and the first thing our team thinks about is, “What are you planning to do? Who’s going to finance the business? Where are your growth plans? How are you going to raise money? What are you going to be delivering to customers over what period of time?”
We’ll understand all of the components around the problem and then we’ll start coming up with the solutions that make the most sense. A lot of times if you’re going to be a venture capital or an institutionally backed a company and you’re going to go through an accelerator program, C-corps can make a lot of sense. If you’re going to be a food and beverage-based company, LLCs can make a lot of sense and we’ve got to be thinking about who their investors are, who the buyers are, all those types of things. What’s the process look like? A lot of times we’ll meet with them and we’ll talk. We’ll say, “Tell me about your business. Tell me about why you guys are starting the company.” It doesn’t end up being much of an accounting discussion to start out with. We want to understand everything and the way we look at ourselves here is we are an accounting firm, but we’re a relationship quarterback. A lot of times they’ll come in here and they might need a bookkeeper or an outsourced CFO or an attorney or a payroll company or a bank.
They might need an introduction to a venture capital fund or an Angel investor. We sit at the center of a lot of those relationships and if we can help make those introductions to folks, then we’re adding a lot of value. When somebody comes into an accounting firm, early stage like that, there’s not a whole lot of work that we can do for them. You got a tax return that you’re going to do at the end of the year for an early stage company. That’s a small task, at least in my opinion it is. All the other things are what’s going to add a lot of value and build the relationship. Five years down the road we might have a good-sized client, but we started it when it was just a little seed.
A tax plan is understanding what are the variables in somebody's world, putting those into a projection type format.
We’ve got the approach that you use. How similar or dissimilar is the high net worth, ultra-high net worth client of your firm from the business owner that you’re talking about?
The planning and the strategy pieces is not too dissimilar. The issues that you’re solving for are different, but the process isn’t too dissimilar. When somebody comes in, usually they’re coming in either pre-transaction or a post-transaction. A very large number of the people that we’re working with have had some event or they’re planning for some event that’s going to put them into that category. If we get them pre-transaction, that’s where we usually start working with them, and there’s a lot of planning that needs to happen around. When’s the transaction going to happen? Have we done the proper planning to not pay any tax that we shouldn’t be paying and to optimize what we need to be paying? Do they have the right relationships around them to optimize everything else? If they’re coming to us first, we’re going to need to make sure that that they’re in a relationship with a financial advisory firm, whether that be a multifamily office or your typical advisory groups. That’s going to be important.
They need to have an estate and trust planning attorney involved. We need to make sure that they’ve got those houses in order and then we talk about the accounting. A lot of times we’re bringing a tax attorney to the table and to start thinking about what the situation looks like, and then we start gathering information and try to figure out where the opportunities might exist. Then we talk and we figure out what opportunities there are and we decide which ones make the most sense to go after and then we do that. When somebody comes in post transaction, there’s a multitude of things that we have to handle.
It depends on how much planning they’ve done in the past, what relationships they’ve had in the past, what planning and, strategy they’ve done in the past. A typical engagement on a year to year basis if we’re not planning for a transaction is bringing a client in mid-year, or maybe it’s quarterly depending on how things are changing for them. Change is what drives how many times we need to be getting together. It’s putting a tax plan together. The tax plan, in our opinion, is not just a tax projection. A tax plan is understanding what are the variables in somebody’s world, putting those into a projection type format.
Once we have a base case scenario, then we start playing with what are the opportunities that exist. If this person has this set of variables and the result of this at the end of the year is going to be X tax due, what opportunities exist. Then let’s start playing with those and running them through different models and saying, ”What if we pay our taxes to the state before the end of the year? What if we implement a certain trust? What if we go down the list of different types of things you can do?” Then you look at what the net effect is in the current year and in the future years. It’s looking at things with all the data that you possibly can and then letting that spark the conversation with the other professionals and come to the right solution. Sometimes tax savings isn’t the best solution. Sometimes it’s something that the financial advisor can do or the estate and trust planning attorney can do. If we all get in one place, we can accomplish the best solution.
It’s lack of surprise.
Sometimes that’s all everybody’s looking for, is just not being surprised at their goal. Maybe the end of the road of all the planning is, “There’s nothing here. We’re doing everything right and here’s how much you’re going to own in six months.”
There’s nothing we can do. It is what it is. What strikes me about all of that for folks is there’s probably misconceptions. I would imagine that as you guys engage with some of these folks, whether it’s pre-liquidity event or post liquidity event, what are the typical misconceptions that you run across from these folks?
It depends on the size of the event, but a lot of people build a relationship with an accounting firm or an accounting software package early on, and then their life changes and they don’t revisit that relationship. One of the misconceptions about our industry is that its data into a spreadsheet or a tax form, it’s either right or it’s wrong. That’s not the case. There are a lot of things that somebody can do to optimize their situation. It’s a problem with the professionals that work in this industry. People don’t think strategically. They think in terms of compliance deadlines and getting those documents finished as fast as possible and everybody complains about how busy they are. It’s not a very inviting environment to ask your CPA questions when they’re talking about how busy they are at the time. We try to change that conversation a little bit. A misconception is that is that there’s nothing that can be done.
Some of that is an educational process because for many folks, particularly the ones that are doing the software-driven version. They don’t know what they don’t know. Shifting gears, we talked a little bit about this when you decided to make the leap. You went from the security of working for a larger firm and you decided with your partner to start your own firm. If you could take us a bit through that thought process and the things that were going on in your mind when you made that decision.
There are a lot of things that were going on in our mind at the time. One of the things was there are some industries that we thought were being underserved. At the time, it was the tech industry that we’re focused on. I’ve met the guys who started Techstars and this is back in 2008 and 2009 when I was chatting with those guys. We’re watching this exciting thing happen in the tech industry, in Boulder and in the Front Range, and we wanted to be a part of that. One of the things that I noticed while working on some of these early stage companies at a large accounting firm is that they’re with a large accounting firm. Because there’s a perception and it’s true that we have the skills and the technical knowledge to get the right answer in a complex audit or tax return for these companies.
These companies are actually more complex than their size would show. They have multiple rounds of equity. They have complex data arrangements. They have warrants and options and all these other things. The problem is that, at least in my experience, when you have a small job at a big firm, you assign your interns and your newly promoted folks to them. Did they get the right tax return? Did they get the right audit? Yes. At the end of the day, they did, but what additional value was provided by a bunch of interns and junior folks? Very little value was provided. The other thing is that a lot of these companies, they don’t have CFOs. They don’t have an entire 35th floor of the Wells Fargo building downtown thinking about their accounting and tax strategy and problems.
We felt like we needed to have a firm that had those technical capabilities but could deliver the service in a more effective way. That’s what we wanted to do when we started the firm. You mentioned job security at the time. At the time, 2010, we’re pretty solidly into the recession at that point. Our firm had implemented some salary changes for folks and had done some layoffs. The security of a large firm or at least the misunderstanding that that existed was pretty evident. The risk in my mind of going out and starting your own firm was not that risky. It seems risky, but what’s the worst that can happen? You go out and get another job afterwards, just with a little less money in your bank account. It doesn’t seem so bad.
Kurtz Fargo: There are a lot of things that public accounting does right, but there are a lot of things that we struggle with as an industry.
You were going through this process and unfortunately in the section that we missed, you were talking about day one or day two when you started the firm. I thought that that was an instructive story. If you would, let’s revisit that story.
We took a weekend and we’ve got six pack of beer and we went over to Chester’s house and measured out his basement to make sure there was enough room for me to move in if the thing didn’t work out. Then we built a spreadsheet and we decided that we didn’t think we’d go bankrupt doing this. We were pretty sure we could pay our mortgages. We decided that we’re going to do. I remember seeing our wives, they were actually pretty nervous, but they were very supportive as well.
You had a six month old.
I did. I had a six month old at the time. Chester had a four-year-old and a two-year-old at the time or something in that range and lots of young kids basically. We had to start this thing. Starting an accounting firm isn’t inexpensive. You got to buy software and that’s expensive. You got to buy research tools, you got to buy computers, you got to run an office, you’ve got to buy desks and that’s all not having any clients and paying attorneys to respond to letters that your previous firm sends you.
Between all of those things, we drained the bank accounts to zero, we maxed out the credit cards out. We put the 401k accounts at zero and then Chester ended up pulling some money out of a life insurance account that his sister owned to try to fund this thing. I think the culmination of all that was when my wife went to the store and she was going to buy some baby formula for our six-month old who had to have formula and a credit card got declined. She called me and asked if she can write a check or if there’s something else that you can use and no, there wasn’t. If we wanted to be on the wall with the bounced checks, she could do that. She ended up having to go to the doctor’s office and getting the formula samples for the next couple days until that bank loan closed. We could get ourselves back on track. We pushed it all the way to the edge and then got started from there.
There’s a point where you’ve gone through this knothole for lack of a better term and you come out the other side. When there was a point where you said, “We’ve got something going on here,” how long did that take you from the early days to feeling pretty good about what you had?
I think we felt like we had something going from day one. Chester and I have very different personalities, but we have a very unified vision of what we wanted to create. We come at it from different angles. We sat down and we put together the list of things that suck about public accounting. It was a pretty long list. That was one of the first things we want to focus on. Our goal was never to be a small CPA firm. We wanted to be something special and we knew that it was going to take people to build that. There are a lot of things that public accounting does right, but there are a lot of things that we struggle with as an industry.
High turnover is one of them. We talk a lot about work life balance, but I don’t think the people we’re selling that to understand what that means. I don’t think the firms that are talking about that are very honest about what they mean by that. We have this high turnover as a result. We pay well, but people end up working crazy hours and they get burnt out in two to four years or maybe a little bit longer if they’re tough. What we’re trying to create here at Kurtz Fargo wouldn’t allow for that. We wanted to work with clients that wanted smart and technically adept people who could think outside the box and who could plan and strategize.
In order to accomplish that, I can’t have a revolving door at the bottom of my organization. I need to have people stick around. We need to pay high salaries that were equivalent to what the other folks are paying at the big four and the other high quality organizations that kids want to go to right out of school. We needed to provide great benefits for our folks that was equivalent to or better than what the other firms are providing. We needed to have extremely low turnover in the organization. We needed to provide the best tools and the best research capabilities.
That’s not easy to do, but we thought about at all in those early days and then we started executing on that. That’s why we’re so different. I haven’t yet found a firm that operates like we do at our size with the clients that we operate with as effectively as we do. I was actually out recruiting in Durango at Fort Lewis College. I like going to small schools because I get to meet some interesting folks. It was interesting, as I was presenting our firm to the students. There were some other accounting firms also presenting to the students and they had been talked to by a number of other national and large accounting firms. It was amazing how excited the students were to go work for a firm in Boulder that works with the kinds of clients we work with and the culture that we have.
I showed them pictures of the inside of our office, and this place is so different. You walk in, it looks like you walked into the wrong office. Did I walk into a tech firm? There’s a bunch of Apple computers on people’s desks. What’s that all about? Why are people wearing jeans around here? It looks nice, but if there’s this different environment, people don’t look stressed...
