Uncovering Hidden Financial Risks in India’s Consumer Goods M&A

India’s consumer goods sector, a vibrant engine of economic growth, attracts significant merger and acquisition (M&A) activity but harbours hidden financial risks that can jeopardise deal value. Senior leaders and decision-makers must navigate these risks with precision, leveraging a hybrid consulting approach to ensure sustainable returns in this dynamic market.

Industry Overview: A Thriving Yet Risky Landscape for Hidden Financial Risks

India’s consumer goods market, valued at $230 billion in 2023, is projected to reach $615 billion by 2030, growing at a CAGR of 27.9%. Contributing ~10% to India’s GDP, it spans fast-moving consumer goods (FMCG), direct-to-consumer (D2C) brands, personal care, packaged foods, home care, and consumer durables. FMCG dominates, with household and personal care (50%), healthcare (31%), and food and beverages (19%) driving sales. Rural markets contribute 35% of revenue, fuelled by rising incomes and digital penetration, while urban areas account for 65%.

The M&A value chain involves strategic buyers (e.g., Hindustan Unilever acquiring D2C brands like OZiva), private equity (PE) and venture capital (VC) firms targeting high-growth assets, due diligence firms scrutinising financials, legal advisors ensuring compliance with bodies like the Food Safety and Standards Authority of India (FSSAI), and the Central Pollution Control Board (CPCB) enforcing environmental mandates. Key structural themes shaping M&A and increasing exposure to hidden financial risks include:

• Consolidation: FMCG giants acquire D2C insurgents to capture digital-first consumers.
• Capital Intensity: High capital turnover (5–8x invested capital) drives interest in EBITDA-accretive deals.
• Complex Due Diligence: Multi-channel sales (e-commerce, quick commerce, kiranas) complicate revenue validation, amplifying hidden financial risks.
• Global Investor Interest: Foreign investors target India’s rural and tier-2 consumption engine, supported by 100% FDI in food processing.

1. Recent Developments Amplifying Hidden Financial Risks (June 2025)

• Recent macro and policy shifts elevate hidden financial risks in consumer goods M&A, requiring meticulous due diligence:

1. PLI Scheme Expansion: The $1.46 billion Production-Linked Incentive (PLI) scheme now covers more FMCG sub-segments, increasing acquisition targets eligible for subsidies. However, non-compliance with eligibility criteria can lead to clawbacks a hidden financial risk affecting valuations.
2. Inflation and Cost Volatility: CPI inflation eased to 2.82% in May 2025, but volatility in palm oil, plastics, and freight costs pressures cost of goods sold (COGS). This complicates margin forecasting and masks hidden financial risks in profitability projections.
3. ESG and Regulatory Mandates: CPCB’s Extended Producer Responsibility (EPR) rules and FSSAI’s stricter labelling requirements introduce compliance liabilities. Non-compliance can result in penalties exceeding ₹5 crore—a hidden financial risk often overlooked.
4. Tax and Trade Policies: Budget 2025 tweaked GST rates on processed foods to 5% and introduced customs duties on packaging inputs. Unresolved tax disputes represent Undisclosed financial liabilities that can erode post-deal margins.
5. VC/PE Trends: The funding winter shifted investor focus to audited profitability and deferred earn-outs, increasing scrutiny of statements to uncover hidden financial risks.

2. Key Challenges in Detecting Hidden Financial Risks

• In consumer goods M&A, hidden financial risks often lurk beneath headline numbers, becoming deal-breakers post-closing:

1. Inflated Receivables: Overstated trade receivables or uncollected debts from distributors inflate revenue, concealing liquidity problems.
2. Underreported Returns: Supermarkets and e-commerce platforms often have high return rates (10–15%)—a hidden financial risk if underreported.
3. Unclaimed Promotional Expenses: Deferred or unrecorded bill-backs in FMCG create contingent liabilities that surface post-acquisition.
4. Working Capital Lock-In: Extended credit terms with kiranas or modern trade channels reduce operational flexibility.
5. Vendor Liabilities and ESG Costs: Outstanding dues or non-compliance with CPCB packaging norms can invite penalties—clear hidden financial risks.
6. Tax Exposures: Misclassified GST inputs or unclosed audits may lead to demands of 18–28%, damaging cash flows.

3. Strategic Implications: A Hybrid Consulting Approach to Hidden Financial Risks

A hybrid framework integrating financial, legal, and technological expertise is essential to uncover and mitigate hidden financial risks in consumer goods M&A.

• Financial Due Diligence Best Practices

1. Strategic Buyers: Normalise EBITDA by excluding non-operating entries (e.g., temporary discounts) and analyse SKU-level P&L to validate consistent margins in volatile categories like edible oils.
2. PE/VC Firms: Adjust for churn in subscription-based D2C models, assess net realisation gaps, and account for inventory obsolescence—especially in perishables and home care.

• Legal and Regulatory Risk Assessment

1. Verify clean ownership of trademarks and IP, which form the core of FMCG brand valuation.
2. Confirm valid and current FSSAI licences across all operational units.
3. Review GST filings for unresolved disputes that may transform into Undisclosed financial liabilities post-acquisition.
4. Audit compliance with EPR mandates to pre-empt CPCB fines that may exceed ₹5 crore.

• Tech and Data-Driven Audits

1. Deploy forensic software (e.g., SAP Concur, Tableau) to reconcile reported vs. actual orders across retail and distribution layers, exposing potential revenue overstatements.
2. Leverage machine learning to detect anomalies in invoicing, customer returns, and revenue recognition, unearthing hidden financial risks before deal closure.

• Deal Structuring to Hedge Risk

1. Earn-Out Tranches: Link consideration to post-acquisition revenue or margin targets to offset overvalued targets.
2. Escrow Buffers: Ring-fence capital for liabilities like pending vendor payments or unpaid taxes.
3. Material Adverse Clause (MAC): Enable renegotiation or withdrawal in the event of regulatory violations or ESG non-compliance.
4. Contingent Insurance: Use customised policies to cover unexpected exposures such as tax penalties or FSSAI infractions.

Illustrative Examples of Hidden Financial Risks in Action

• FMCG Buyout Gone Wrong

A packaged food brand deferred ₹15 crore in promotional expenses to inflate EBITDA. After the deal closed, major retailers submitted bill-back claims, reducing margins by 18%. This exposed hidden financial risks that triggered a ₹20 crore working capital crisis for the buyer.

• Smart Due Diligence Win

An acquirer of a consumer durables brand detected pending GST audits and ₹8 crore in logistics cost understatements. The final deal was restructured with a ₹10 crore indemnity clause and performance-based payouts, protecting against hidden financial risks and ensuring financial hygiene.

Conclusion: Mitigating Hidden Financial Risks for High-Impact M&A

Uncovering hidden financial risks is mission-critical for success in India’s consumer goods M&A environment. Senior decision-makers must adopt a hybrid due diligence strategy—merging financial forensics, legal scrutiny, and data analytics—to detect and mitigate these risks early. Proactive identification ensures that bold acquisition moves translate into sustainable, profitable outcomes.

Partnering with experts like LawCrust ensures sharper risk detection, smarter deal structuring, and long-term value preservation in India’s high-growth consumer goods sector.

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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