Leverage of investments in Brazil

It is well known that in order to accelerate a business operation, in any area of activity, a widely used tool is to raise funds through the issue of shares in the case of Variable Capital corporations or the assignment of capital quotas in the case of limited liability companies – LLC. so that resources from investors can be injected into the company and thus have the business acceleration process assured.

Throughout the investment process, the company that wishes to receive these resources ends up going through a validation stage of its accounting information that ensures its equity position before receiving the injection of capital, which is usually done through a Due Diligence performed by an external company that will bring comfort to the investor that the information related to billing, accounts receivable, accounts payable, total assets, balances in investments, etc. are really adequate in all relevant aspects.

To have a satisfactory result, it is essential that the company to be invested in mainly has the following accounting information:

  • Basis of preparation of the financial statements – The company that wishes to receive the investment must inform which basis its accounting information was prepared, IFRS for SMEs or IFRS Full, currently the first option is intended for small and medium-sized companies and the second is for large companies that are defined by Law 11.638 as entities with revenues equal to or greater than R$ 300 million per year or total assets equal to or greater than R$ 240 million, the larger the company, the greater the level of accounting detail will be required.
  • Monthly Updated Balance Sheet – This document will show that the company’s accounting is up to date and that it is done on a monthly basis, bringing greater assurance that the figures presented are reliable because they are being reported on time.
  • Income Statement – In the Income Statement the company shows the financial performance of that year that is being reported, so the investor will be able to evaluate if the performance is within its minimum parameters for the capital contribution.
  • Balance breakdowns – Unfortunately, it is still common for many companies not to have the breakdown of the accounting balances of their balance sheet accounts. The breakdowns allow the values that are synthetically presented in the trial balance to be detailed so that the auditors can perform the necessary tests and ensure that the reported number is properly presented in all relevant aspects, thus having the reconciliations will demonstrate the quality of the accounting numbers and make the Due Diligence process much faster.
  • Corporate Documents – Articles of incorporation, minutes of Board meetings, updated Bylaws, are documents that will prove the correct distribution of the capital of the invested company its current quotaholders/shareholders;

This list above is not exhaustive, but is the necessary basis to carry out a validation process of the accounting balances, therefore, other documents may be required in a Due Diligence process and these will be informed by the company that will perform the work, in due time.

If your company wants to start raising investments but still needs an accounting restructuring to have auditable numbers, it is very important that this sanitation is done immediately before the start of the Due Diligence work, so it will be a much less costly and faster process benefiting all parties involved.

Did you know?

Drummond Outsourcing is ready to serve both the preparation of monthly accounting  and the performance of Due Diligence processes in companies that are being evaluated for possible investment?

If you want more information just send an email to info@drummondadvisors.com.

Written by Maikon Luiz, Head of Operations BR at Drummond Advisors

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