Restructuring and insolvency in the food and beverage sector: What to watch for and why it matters

The Canadian food and beverage industry has faced significant challenges in recent years, with insolvency and restructuring becoming increasingly common. As market conditions continue to shift and financial pressures mount, understanding the warning signs – and knowing when to seek expert help – is critical for leaders in the food and beverage space.

In a distressed market, where rising costs, inflation, and labour shortages are squeezing already tight margins, awareness and flexibility are vital. Many businesses are struggling to recover from pandemic-era debt, with lenders less willing to extend forbearance or refinance. Consumer demand is also changing rapidly, and companies are forced to reassess their product mix, pricing, and distribution channels to stay viable.

With this lens, insolvency in the industry has a key role to play. Being insolvent is not just about closing your business, getting the right advice and using the right tools often enables a successful restructuring, sale of assets, or transition to new ownership, preserving jobs and value where possible.

But how do you know when it’s time to act? Here are some key indicators of distress that signal the need to meet with an advisor to go over your options:

Financial indicators

• Financial ratios and covenants (such as current ratio, debt-to-equity, and interest coverage) are not just for the bank – they’re essential tools for management. Calculate them regularly and benchmark against industry standards and peers.
• Declining gross margins and persistent cash flow shortfalls. Food and beverage companies are facing significant input volatility in the cost of food, packaging, transportation and fuel, refrigeration, and utilities. Contact and advisor early to ensure you can keep your options open.
• Don’t ignore covenant breaches. If you’re close to breaching, take it seriously and act early. Many businesses only realize the severity when their bank refuses to refinance or calls in a loan.
• COVID relief loans are either due or coming due and banks are less forgiving. If you can’t pay, seek help before the situation escalates.
• Personal guarantees aren’t uncommon in the food and beverage industry but it’s key to understand the potential consequences and know that banks will enforce these guarantees.

Non-financial indicators

Other indicators of distress can be just as important as financial ones. If something feels off or you’ve seen the CFO make decisions that raise flags, ask questions – don’t assume everything is fine.

• C-suite resignations often signal deeper issues. Regular meetings with management and the board can reveal problems early and give you time to act.
• Stretching or delaying payments to suppliers or CRA beyond terms, using deposits, GST remittances, or source deductions as working capital – or to fund operations – is not an effective financial strategy. It typically results in significant interest and severe penalties.
• Menu or product inflexibility. If a food producer, processor, or restaurant is losing customers when it tries to raise prices, reduce or change SKUs, or otherwise adjust to manage cost increases, a change of strategy is likely needed to avoid insolvency.
• Declining customer traffic or poor reviews are an indicator of deep issues that can spiral quickly. Acting appropriately and swiftly can ensure your product or service isn’t negatively impacted by online sentiment.
• Litigation is another key area to focus on and act swiftly. If left to linger, default judgements can quickly reduce your company’s ability to continue. Address legal issues proactively and appropriately.
• Communication from banks that go unanswered are a red flag. If you’re struggling to negotiate or refinance, get advisors involved early.
• Unforeseen events – like a fire, flood, major customer or supplier going bankrupt – can happen at any time. Disaster recovery plans and diversification are ideal but for smaller businesses, it isn’t always a priority. Have a contingency plan in place and take the time to ensure it’s ready when you need it.
• Workplace culture and an aging workforce can erode resilience. Restaurants and food processors rely heavily on labour. High turnover, reliance on overtime to cover staffing gaps, and an inability to retain key chefs, manager, or productions supervisors can cause significant service inconsistencies and impact revenues. Stay connected to employee morale and succession planning.

Restructuring and insolvency in Canada’s food and beverage sector is not just a last resort, but rather, a strategic tool. It provides legal frameworks for businesses to address unsustainable debt, restructuring options, or exit the market in as orderly a way as possible – helping preserve value for creditors, employees, and communities wherever possible.

To learn more about MNP’s Corporate Insolvency and Restructuring team and how they can help you better understand your situation, and your options, visit our page or contact your local advisor today.