Identifying Hidden Liabilities in India’s Food Industry M&A

India’s food industry is experiencing an unprecedented surge in mergers and acquisitions (M&A), fueled by robust growth in packaged foods, quick-service restaurants (QSRs), plant-based products, and functional foods. In 2024, M&A deal volumes in these segments grew by 15%, with transactions valued at over $2 billion. This dynamic landscape is driven by brand consolidation, market expansion, technology acquisition, and value-chain integration. Yet, beneath these promising opportunities lurk hidden liabilities that can jeopardise deal safety and undermine post-acquisition success. Identifying hidden liabilities during food M&A due diligence is critical to ensuring accurate valuations and sustainable growth.

Understanding Hidden Liabilities in Food M&A

Hidden liabilities in M&A extend beyond unrecorded debts to encompass financial risks, undisclosed contractual obligations, pending legal disputes, compliance gaps, and environmental exposures not readily visible on a company’s balance sheet. These liabilities can inflate purchase prices, disrupt earn-out structures, and complicate post-acquisition integration, leading to significant financial and reputational damage.

In the food industry, hidden liabilities are particularly critical due to sector-specific risks. Common issues include unreported Food Safety and Standards Authority of India (FSSAI) violations, ambiguous supply chain contracts, non-compliance with Environmental, Social, and Governance (ESG) norms, unresolved tax disputes, product recall risks, and unsettled intellectual property (IP) claims. Each of these can translate into substantial acquisition risks if not addressed during due diligence.

• Financial Due Diligence Approach to Uncover Hidden Liabilities

A robust food M&A due diligence process is essential to uncover hiddens liabilities. The following methods ensure comprehensive scrutiny:

1. Balance Sheet Review: Scrutinise debt levels, off-balance sheet obligations, and contingent liabilities, such as leases, guarantees, or unfunded pension obligations, that could become actual debts post-acquisition.
2. Legal Exposure Mapping: Verify litigation history, FSSAI compliance, consumer claims, and pending regulatory actions to assess their likelihood and financial impact.
3. Tax and Financial Risks: Examine tax filings, pending assessments, and Goods and Services Tax (GST) credit positions to identify potential tax-related hidden liabilities.
4. Contractual Liabilities: Review supplier, distributor, and lease agreements for restrictive clauses or hidden risks that could affect profitability or operations.
5. Operational Audits: Assess plant hygiene, food safety certifications, and past product quality issues, as these can escalate into significant financial or reputational liabilities.
6. Environmental & ESG Risks: Evaluate waste management practices and compliance with Business Responsibility and Sustainability Reporting (BRSR) norms, particularly for listed entities, to uncover potential environmental liabilities.

1. Illustrative M&A Examples Highlighting Hidden Liabilities

Real-world cases highlight the consequences of overlooking hidden liabilities:

1. A QSR chain acquisition suffered when unreported FSSAI non-compliance issues surfaced post-deal, leading to hefty penalties and operational disruptions. A thorough legal exposure mapping during due diligence could have flagged these risks early.
2. In a packaged food brand acquisition, inadequate debt analysis missed critical working capital shortfalls, resulting in severe post-closing cash flow challenges. A detailed balance sheet review could have prevented this oversight.
3. A frozen food startup acquisition revealed outdated cold-chain infrastructure post-closing, requiring significant capital expenditure. An operational audit during due diligence would have identified these hidden liabilities, allowing better deal structuring.

2. Best Practices for Deal Safety and Risk Mitigation

To safeguard against hidden liabilities and ensure deal safety, senior leaders should adopt the following best practices:

• Mandate Independent Due Diligence: Engage independent financial and legal experts to conduct unbiased due diligence, ensuring a thorough identification of hidden liabilities.
• Structure Deals Strategically: Use holdbacks, indemnities, and escrow arrangements to offset potential hidden liabilities that emerge post-acquisition.
• Leverage Warranty & Indemnity Insurance: For large transactions, consider Warranty & Indemnity (W&I) insurance to provide financial protection against undisclosed liabilities.
• Engage Food-Specific Experts: Involve specialists in food safety, hygiene, ESG compliance, and regulatory frameworks to uncover industry-specific acquisition risks.
• Prioritise Post-Deal Audits: Conduct immediate post-acquisition integration audits to address any uncovered hidden liabilities swiftly, ensuring a smooth transition.

Conclusion

Proactively identifying hidden liabilities during food industry M&A is critical for ensuring deal safety, achieving accurate pricing, and protecting long-term value. India’s dynamic food sector, with its rapid growth and complex regulatory environment, demands heightened vigilance. A hybrid consulting approach integrating expertise in finance, legal, operational, and regulatory domains safeguards acquisitions and unlocks sustainable value. By diligently uncovering hidden liabilities, decision-makers can transform potential risks into opportunities for success.

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