Mitigating Deal Risks: The Role of Equipment Compliance in Food M&A

India’s $900+ billion food industry is witnessing rapid M&A across dairy, RTE, nutraceuticals, and cold chain. A key success factor in these deals is equipment compliance essential for regulatory approval, seamless operations, and value protection. This brief offers a hybrid consulting lens to help senior leaders assess compliance risks and ensure robust manufacturing due diligence during Food M&A.

Industry Context: Equipment Compliance in India’s Food Sector

India’s fast-growing food processing sector driven by urban demand and PLI incentives relies heavily on equipment compliance to ensure safety, efficiency, and regulatory approval. Non-compliance, like outdated or uncertified machinery, has led to costly shutdowns in segments such as dairy. For Food M&A, robust due diligence on equipment is essential to avoid operational disruptions and protect deal value.

1. Strategic Role in Food M&A

Equipment compliance directly impacts deal valuation, post-merger integration, and risk exposure. Compliant, modern equipment enhances asset value and supports seamless integration, while non-compliance can erode trust and inflate costs. For instance, a 2023 acquisition of a packaged snacks company revealed non-compliant heat-sealing machines, leading to a ₹10 crore valuation adjustment due to retrofit costs and FSSAI delay risks. Similarly, failure to verify equipment compliance has caused post-deal CAPEX overruns, as seen in a cold chain merger where outdated refrigeration units required ₹15 crore in replacements, delaying ROI. Conversely, IoT-enabled equipment can streamline integration, reducing downtime and boosting operational synergy, making equipment compliance a strategic priority in Food M&A.

2. Key Dimensions to Assess Equipment Compliance

Evaluating equipment compliance requires a multi-faceted approach, covering technical, legal, financial, and operational dimensions:

1. Technical: Assess equipment age, capacity, automation level, and spare parts availability. To ensure regulatory alignment, companies must consistently adhere to Good Manufacturing Practices (GMP). Older equipment may lack efficiency or compatibility with modern automation standards.
2. Legal/Regulatory:Verify FSSAI tags, calibration logs, recall history, and operator certifications to ensure equipment compliance. BIS or fire code lapses can trigger sanctions or halt production, raising deal risks.
3. Financial: Analyse replacement costs, depreciation policies, repair trends, and energy inefficiencies. High-maintenance equipment or energy-intensive systems can inflate long-term costs, impacting deal economics.
4. Operational: Furthermore, evaluate uptime ratios and cleaning protocols, such as Clean-in-Place or Sterilise-in-Place systems.Inefficient cleaning protocols or unskilled operators can disrupt production post-merger.

3. Manufacturing Due Diligence Lens

A robust manufacturing due diligence process for equipment compliance involves an on-ground audit checklist:

1. Visual Inspection: Check for wear, corrosion, or unauthorised retrofits that compromise safety or efficiency.
2. Compliance Documents: Review FSSAI certifications, BIS compliance records, and calibration logs to ensure regulatory standards are met.
3. Maintenance Logs: Analyse repair frequency and downtime records to gauge equipment reliability and maintenance costs.
4. Integration Readiness: Confirm compatibility with IoT platforms or ERP systems to ensure post-merger scalability.
5. Red Flags: Watch for missing Business Responsibility and Sustainability Reporting (BRSR) ESG disclosures, non-compliant layouts violating fire/FDA codes, or untraceable equipment provenance, all of which signal deal risks.

4. Legal & Deal Structuring Implications

Gaps in equipment compliance can significantly shape deal structuring and legal agreements:

1. Indemnity Clauses: Non-compliant equipment may warrant stronger indemnity protections to cover potential regulatory penalties or retrofit costs.
2. Escrow Triggers: Allocate escrow funds to address unforeseen CAPEX for equipment upgrades, ensuring financial safeguards.
3. CAPEX Holdbacks: Negotiate holdbacks to account for replacement or compliance costs, as seen in a 2024 RTE merger where ₹5 crore was held back for non-compliant packaging lines.
4. Reps & Warranties:To mitigate post-deal disputes, expand representations and warranties to explicitly cover equipment compliance. Moreover, include PLI-related machinery subsidy disclosures to ensure full transparency and regulatory alignment.

In this context, legal advisors such as those from LawCrust can play a crucial role in strengthening deal safeguards. Not only do they help ensure that these clauses are robust and well-structured, but they also align the transaction with India’s complex regulatory landscape. As a result, acquirers are better protected from hidden liabilities and post-deal surprises.

Illustrative Examples

Real-world scenarios highlight the stakes of equipment compliance in Food M&A:

• Case 1: During the acquisition of a millet-snack processor, due diligence uncovered heat-sealing units lacking BIS certification. The acquirer renegotiated ₹8 crore off the deal price, citing retrofit CAPEX and FSSAI delay risks, demonstrating how equipment compliance gaps can reshape valuations.
• Case 2: In a dairy M&A, IoT-ready pasteurisers enabled seamless ERP integration post-merger, reducing SKU downtime by 22% in Q1. This underscored how compliant, tech-enabled equipment can drive operational efficiency and post-deal success.

Conclusion

Assessing equipment compliance during Food M&A is critical for protecting deal value, ensuring regulatory adherence, and enabling scalable operations. Therefore, by integrating technical, legal, financial, and operational evaluations into a hybrid due diligence playbook, acquirers can effectively mitigate deal risks and unlock synergies. Moreover, senior leaders must prioritise equipment compliance as a strategic lever, while leveraging expertise from firms like LawCrust to navigate India’s regulatory and operational complexities.

About LawCrust

LawCrust Global Consulting Ltd. delivers cutting-edge Hybrid Consulting Solutions in Management, Finance, Technology, and Legal Consulting to ambitious businesses worldwide. Recognised for our cross-functional expertise and hybrid consulting approach, we empower startups, SMEs, and enterprises to scale efficiently, innovate boldly, and navigate complexity with confidence. Our services span key areas such as Investment Banking, Fundraising, Mergers & Acquisitions, Private Placement, and Debt Restructuring & Transformation, positioning us as a strategic partner for growth and resilience. With an integrated consulting model, fixed-cost engagements, and a virtual delivery framework, we make business transformation accessible, agile, and impactful.

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