CFO Consulting Partners, Author at CFO Consulting Partners

Biweekly Newsletter – Fintech in 2019

August 5, 2019 By CFO Consulting Partners

Following the trend of our latest newsletter, AI and Machine Learning, this newsletter will focus on the growth of FinTech in 2019.

Deloitte defines financial technology (“FinTech”) as “digital innovation in the financial sector. At its inception, the understanding of FinTech was limited to innovative ways of facilitating payments and transactions. Underpinned by revolutionary shifts in internet and mobile technology in recent years, the realm of FinTech has witnessed explosive growth. Nowadays, it refers to a wide variety of technological interventions within the financial services arena, such as crowdfunding, online customer acquisition, mobile wallets, P2P lending, MPOS (mobile point of sale), MSME (micro, small, and medium enterprise) services, personal financial management, private financial planning, Blockchain and cryptocurrencies. FinTech is also used to describe businesses that aim to provide financial services by making use of software and modern technology.”

Below are recently published articles related to FinTech:

Antonio Gara in, The Future of Wall Street: FinTech 50 2019, analyzes the Forbes FinTech 50 and provides a brief description of top FinTech firms, what they do, who their users are, and how much they’re worth.
In The Fintech Revolution: Who Are the New Competitors in Banking, Eloi Noya looks at three common characteristics that threaten incumbent banks:
- Focus on a single product
- Use of advanced technology to achieve a competitive edge
- Clear customer orientation with a focus on solving users’ problems

Should FinTechs be regulated like banks? Maybe it levels the playing field, or maybe it paves the way for FinTech’s to have direct access to the payment system?

By Zach Gould, CFO Consulting Partners

Case Study – Cutting the Cord – Creating Infrastructure for a Carve Out

July 23, 2019 By CFO Consulting Partners

Industry: Media

Type of Service: Determine requirements to operate the business independent of its former owner and help design new systems and assist with integration so that the business can operate independently of its previous owner.

Background
An Asia based family office acquired the assets of a 90-year-old magazine brand from a U.S. based publishing conglomerate. The acquirer intends to grow the brand internationally and utilize the brand’s significant name recognition and storied reputation to expand revenue stream opportunities.

Issue
The acquirer is based in Asia and has no current infrastructure to operate the business. As typical in the consolidated magazine industry, operating and financial functions were handled by the seller on a multi-brand basis by specific departments, (Finance, Production, Circulation, Ad Sales, etc.) and therefore most existing staff, systems and vendor relationships remained with the seller. Specifically, the entire finance staff, as well as the accounting systems, remained with the seller.

The parties agreed that the seller would continue to operate the business for a short period to allow the buyer to create the infrastructure and hire the staff to operate on its own.

What we did
The project manager for the acquirer reached out to CFO Consulting Partners (CFOCP) to provide a consultant to lead the transition of the finance and accounting function for the acquirer, including the implementation of accounting systems and assist with the hiring of permanent staff for the office of the CFO.
During the transition period, the consultant, working with others on the transition team, assumed the CFO function of the acquirer and performed the following:
• Set up international banking and credit card processing relationships
• Developed a global chart of accounts, complicated by a complex international tax structure, multi-country operations, and multi-currency issues
• Migrated data from the seller’s ERP
• Assisted with integration into the ERP of ancillary systems such as Salesforce and Concur (payables management) as well as industry-specific software utilized for functions such as international licensing, circulation, newsstand and ad sales
• Upon multiple interviews with the seller’s operating and finance team, created an accounting manual addressing the go-forward business processes as well as complex issues such as international accounting policy, revenue recognition, Vat accounting, 3rd party licensing, consolidation procedures and tax reporting structures
• Provided cash flow projections
• Managed tax reporting during the transition
• Negotiated new vendor and advertiser relationships
• Interviewed auditors for the acquirer
• Assisted in hiring and transitioning of the finance function to the permanent staff

Results
CFOCP, which specializes in providing senior-level financial management services, supported the acquirer by providing interim finance leadership while developing policies and procedures to allow the acquirer to operate the finance function on a stand-alone basis. CFOCP helped identify and manage the implementation of systems, including NetSuite and Concur. The CFOCP member became an integral member of the transition management team. Day-to-day finance functions were properly handled during the transition, systems were identified and implemented, procedures were documented, and the finance function was successfully transitioned to the new team.

by John DeLorenzo, Director, CFO Consulting Partners

CFO Consulting Partners is a proud sponsor of the Exit Planning Exchange (XPX). XPX is a multi-disciplinary community of professional advisors who work collaboratively to help owners build a valuable business and assist them in preparing and executing a successful transition.

CFO Consulting Partners XPX Advisors:
Oliver Brooks
Steven Crowley
David DeMuth
John Kovacs
Mark Sloan
Allan Tepper
Joseph VonEhr

Biweekly Newsletter – Machine Learning and Artificial Intelligence

July 15, 2019 By CFO Consulting Partners

Machine learning has the potential to disrupt every industry. A computer’s ability to iterate through data and solve complex mathematical calculations is developing rapidly with improved processing speeds and data storage.

SAS Insights defines machine learning as “a method of data analysis that automates analytical model building. It is a branch of artificial intelligence based on the idea that systems can learn from data, identify patterns, and make decisions with minimal human intervention.”

“Humans can typically create one or two good [financial] models a week; machine learning can create thousands of models a week”

-Thomas H. Davenport, an excerpt from The Wall Street Journal

Below are recently published articles surrounding the world of AI:

How are top-performing companies in all industries using AI in marketing to improve their brand image and revenue? Louis Columbus’s article, “10 Charts That Will Change Your Perspective of AI in Marketing” include staggering statistics on how AI “enables marketers to understand sales cycles better, correlating their strategies and spending to sales results.”
How does one value the most critical asset of modern business, information? In Virginia Collins and Joel Lanz’s article titled “Managing Data as an Asset,” Collins and Lanz explain how “treating data as an asset can enhance its value, facilitate organizational activities, and achieve strategic goals.”
In Steve Lohr’s article, “How Do You Govern Machines That Can Learn? Policymakers Are Trying to Figure That Out,” Lohr analyzes brainstormed legislation by The Organization for Economic Cooperation and Development, whose policy focused on AI, attempts to “foster responsible economic development, balancing innovation and social protections.”

By Zach Gould, CFO Consulting Partners

Newsletter – June 2019

June 25, 2019 By CFO Consulting Partners

Qualified Opportunity Zones – an Executive Summary

Mark Sloan, Director, CFO Consulting Partners

There has been much discussion regarding Qualified Opportunity Zones (“QOZ”), the tax benefits of investing in a QOZ and how it should fit into a strategy of minimizing taxes on long term capital gains. This newsletter will provide an overview as to the rules governing QOZ and some practical considerations regarding investing in QOZ.

BACKGROUND:

As a result of the Tax Cut and Jobs Act (“TCJA”) passed in late 2017, a taxpayer may elect to recognize certain tax deferrals and exclusions on the gain realized from the sale or exchange of property to an unrelated party if the gain is reinvested in a qualified opportunity zone fund within 180 days from the date of the sale or exchange and the gain remains invested for a defined period of time.

Opportunity zones are eligible low-income census tracts that had either poverty rates of at least 20 percent or median family incomes no greater than 80 percent of their surrounding area’s, according to the U.S. Census Bureau’s 2011-2015 American Community Survey. Such tracts have been nominated by governors and certified by the U.S. Department of Treasury for designation as an Opportunity Zone. There are over 8,700 such tracts located throughout the United States.

A qualified opportunity fund (“QOF”) is the vehicle to which gains must be invested in order to qualify for the tax benefits of the program. In order to achieve the tax benefits, the taxpayer must invest in a QOF and not directly into qualified opportunity zone property. A QOF is a corporation or partnership organized with the specific purpose of investing in opportunity zone assets. The entity must invest at least 90% of its assets in qualified opportunity zone property.

Qualified opportunity zone property can be in the form of direct ownership of business property, or into opportunity zone portfolio companies through either stock ownership or partnership interest. Certain businesses are precluded for consideration as property to be held by opportunity zone portfolio companies and these include golf courses, country clubs, massage parlors, tanning salons, hot tub facilities, racetracks, casinos or any other gambling establishment and liquor stores. These limitations do not apply when a QOF is investing into the Qualified Opportunity Zone directly.

Upon the investment of qualified gains, the basis in the capital gains will be zero. The gain will then be recognized into income on the earliest of the disposition of the opportunity zone property or December 31, 2026. If the QOF is held five years, then the taxpayer’s basis is increased by 10% of the original gain and then it is increased another 5% if held for another two years. If the QOF is held at least ten years, then all gains attributable to the appreciation on the original gain will be excluded from income.

BENEFITS:
There are numerous tax benefits attributable to the timely investment of capital gains into a QOF.

Deferral of tax on invested capital gains until December 31, 2026, at the latest;
Permanent exclusion of tax on capital gains of up to 15% if held for seven years, and;
Permanent exclusion of tax on any subsequent appreciation on the invested capital gains if held for more than ten years.

OTHER CONSIDERATIONS:

There are other advantages to investing in a QOF that make it a more flexible option to Section 1031 as a means to shelter capital gains:

As opposed to Section 1031, which requires the investment of the full proceeds in order to qualify for temporary tax deferral on gains, only the gain portion of the proceeds needs to be invested, freeing up cash at the time of the original sale of capital assets.
Investment in a QOF can provide permanent exclusion of tax on a portion of capital gains; Section 1031 transactions will only provide for deferral of tax on capital gains.
As opposed to Section 1031, which requires the investment of proceeds into like kind assets, the only requirement for a QOF is that the gains are invested into opportunity zone assets. For example, if a work of art is sold at a gain, then the gain can be invested in a different class of asset such as real estate.
It should be noted that as a result of the TCJA, the use of Section 1031 is now limited to real estate assets and no longer other types of capital assets.

While there are significant benefits to investing in opportunity zone funds, there are certain caveats that need to be considered:

If the investment has not been disposed of sooner, the invested gain will be recognized in income at December 31, 2026. This means that the taxpayer will need to provide liquidity for this event while the gain is still locked up in the investment.
To achieve the 15% permanent exclusion on the original gain, there must be a rollover of the gain no later than December 31, 2019 in order to achieve the 7 year holding period for this exclusion.
To maximize the tax benefits attributable to this program, the strategy is to lock up the invested gains for a period of ten years. This could result in a lower IRR over the life of the project.
Although the census data used to designate tracts as opportunity zones is dated and there may be some areas that have gone through improvement, there can still be a higher risk attributable to investing in areas that are opportunity zones.
An investor may not contribute appreciated property directly into the QOF. Such property must be first sold (and begin the clock running for the recognition of a portion of the gain) and the amount attributable to the gain invested into the fund.
The regulations impose limitations on the amount of cash and intangible assets that can be held at any time by an opportunity zone fund. This limitation can be mitigated through a structure where the QOF invests into an opportunity zone portfolio company (either through stock ownership or partnership interest). Under this structure, the portfolio company can hold intangible assets that are used in an active trade or business and cash in an amount for reasonable working capital needs.
The investment in opportunity zone funds should be evaluated on the overall economics of the fund and its strategy, and there should not be disproportional weight given to the tax deferral/exclusion feature of the program as the basis for investing in the opportunity zone.

This newsletter is meant as a broad overview on Qualified Opportunity Zones. There are many other details concerning the structure of funds, limitations on the type of assets that can be held by a QOF, determination of original use and subsequent improvements, etc. CFO Consulting Partners has been following developments in this area and we stand ready to provide you with guidance in navigating through this new and challenging area. In addition to helping you understand the details and advising you if this program can fit into your investment strategy, we also have relationships with various sponsors and service providers who can offer you opportunities with various funds that they have established. We also have relationships with law firms who can evaluate that the funds are structured in accordance with Treasury regulations.

CFO Consulting Partners XPX Advisors: