Navigating M&A in India’s Consumer Goods Sector: Avoiding Incomplete Due Diligence

India’s consumer goods sector is a vibrant engine of growth, driven by rising incomes, shifting consumer preferences, and rapid digitalisation. However, the surge in mergers and acquisitions (M&A) in this space spanning fast-moving consumer goods (FMCG), packaged foods, personal care, home care, and consumer durables introduces significant risks. Incomplete due diligence can unravel even the most promising deals, exposing acquirers to financial, legal, operational, and reputational pitfalls. This article, informed by a hybrid consulting lens, equips senior leaders in India’s consumer goods sector with strategies to navigate M&A complexities and avoid the perils of incomplete due diligence.

The Consumer Goods M&A Landscape in India: Why Incomplete Due Diligence is Dangerous

India’s consumer goods sector, projected to reach $220 billion by 2025, is a hotbed of M&A activity. Legacy players like Hindustan Unilever consolidate to fortify market dominance, while private equity firms pursue lucrative exits from high-growth direct-to-consumer (D2C) brands. Global corporations acquire regional players to tap into India’s diverse, region-specific consumer preferences. The sector’s value chain is complex, involving manufacturers, distributors, e-commerce platforms, and stringent oversight from regulatory bodies like the Food Safety and Standards Authority of India (FSSAI). Fragmented supply chains, regional market nuances, and regulatory volatility amplify the need for thorough due diligence. Incomplete due diligence in this competitive landscape risks derailing strategic objectives and eroding deal value.

1. Understanding Incomplete Due Diligence in Consumer Goods M&A

Incomplete due diligence occurs when critical aspects of a target company are inadequately assessed, leaving acquirers vulnerable to hidden liabilities. In consumer goods M&A, this may include missed tax obligations, unclear intellectual property (IP) ownership, environmental, social, and governance (ESG) non-compliance, or inflated user metrics in D2C businesses. Due diligence encompasses:

• Financial Due Diligence: Validates revenue, EBITDA, debt, and tax compliance, including Goods and Services Tax (GST) filings.
• Legal Due Diligence: Reviews contracts, regulatory compliance (e.g., FSSAI, labour laws), and litigation risks.
• Operational Due Diligence: Assesses supply chain resilience, inventory accuracy, and vendor dependencies.
• Technical Due Diligence: Evaluates IT infrastructure, data security, and IP licensing.
• Brand and ESG Due Diligence: Analyses consumer perception, sustainability practices, and regional brand strength.

Fragmented supply chains and India’s evolving regulatory framework heighten the risk of Insufficient due diligence. For instance, overlooking FSSAI compliance or unresolved GST disputes can lead to significant financial and reputational liabilities post-acquisition.

2. Strategic Risks of Incomplete Due Diligence in FMCG and Consumer Goods M&A

A hybrid consulting approach integrating management, finance, legal, and technology expertise reveals the multifaceted risks of incomplete due diligence:

• Financial Risks

Overstated EBITDA, hidden debt, or unresolved GST litigations can inflate valuations and erode returns. Insufficient due diligence may miss aggressive revenue recognition or off-balance-sheet liabilities, leading to costly write-downs.

• Legal and Compliance Risks

Non-compliance with FSSAI standards, packaging violations, labour disputes, or Extended Producer Responsibility (EPR) requirements for plastic waste can trigger penalties and recalls. Insufficient due diligence in legal scoping often uncovers such issues too late.

• Technology and IP Risks

D2C brands rely on technology, yet incomplete due diligence may overlook unsecured customer data, outdated tech stacks, or ambiguous IP licences. For example, a proprietary formula lacking clear patent protection can spark post-deal disputes.

• Operational Risks

Inaccurate inventory, single-vendor dependencies, or weak supply chain resilience can disrupt operations. Incomplete due diligence in this area risks stockouts, delayed deliveries, and increased costs in a margin-sensitive sector.

• Brand and ESG Risks

Consumer trust is paramount. Incomplete due diligence may miss greenwashing claims, regional brand dilution, or consumer backlash risks, alienating discerning customers and attracting regulatory scrutiny.

3. Case Examples and Red Flags of Incomplete Due Diligence

Real-world examples highlight the cost of incomplete due diligence:

• Case 1: Herbal Brand Acquisitio: A leading FMCG firm acquired a herbal personal care brand without verifying its labelling compliance history. Post-deal, FSSAI fines and product recalls due to non-compliant claims cost millions, underscoring the fallout of Insufficient due diligence.

• Case 2: D2C Platform Failure: An investor acquired a D2C packaged foods platform, only to find its tech infrastructure couldn’t scale. Logistics breakdowns and rising customer acquisition costs (CAC) eroded profitability, a direct result of Insufficient technical due diligence.

• Red Flags:

1. Last-minute refusals to provide audit reports or key data.
2. Inconsistent vendor or distributor data, signalling supply chain risks.
3. Absence of formal standard operating procedures (SOPs).
4. Lack of consumer data protection clauses, increasing cybersecurity risks.

4. Mitigating Risks: Avoiding Incomplete Due Diligence with Robust M&A Practices

• To counter incomplete due diligence, consumer goods leaders must adopt a proactive approach:

1. Customised Checklists: Develop diligence checklists specific to consumer goods, covering FSSAI compliance, GST filings, IP ownership, supply chain audits, and ESG metrics.
2. Cross-Functional Teams: Assemble experts in finance, legal, technology, supply chain, and marketing to ensure holistic analysis. A supply chain specialist can verify vendor reliability, while a legal expert confirms EPR compliance.
3. Deal Structuring Levers: Use escrows, indemnities, earn-outs, and representations and warranties (R&W) insurance to mitigate risks. For instance, an escrow can cover potential FSSAI penalties.
4. Modern Tools: Leverage virtual data rooms for secure document sharing, AI-based compliance monitoring to flag regulatory gaps, and blockchain for supply chain transparency to prevent Insufficient due diligence.

5. Strategic Takeaways for Consumer Goods Leaders

Incomplete due diligence in consumer goods M&A carries steep costs: valuation mismatches, regulatory penalties, operational disruptions, and brand damage. Robust due diligence, however, is a value-creation tool, uncovering synergies, validating growth potential, and informing post-deal integration. Leaders must advocate for long-term integration planning based on diligence insights, transforming acquisitions into strategic growth drivers.

Conclusion: Future-Proofing Deals by Eliminating Incomplete Due Diligence

In India’s dynamic consumer goods M&A landscape, incomplete due diligence poses profound risks. A hybrid consulting approach integrating finance, legal, technology, and operations expertise ensures thorough assessments and future-proofs transactions. By prioritising comprehensive due diligence, leaders can mitigate risks, unlock value, and position their organisations for sustained success. Partner with trusted advisers like LawCrust to navigate these complexities with confidence.

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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