A miss against plan in year one is common enough to prepare for before it happens. Here is the sequence a sponsor should actually work through, from the boardroom to the insolvency backstop.
Key takeaways
STEP 01 OF 10
These call for different responses, and conflating them wastes time either way. A shortfall against an aggressive underwriting case is a planning and execution problem; a business burning cash toward insolvency is a different, more urgent one. Build a short, factual assessment — cash runway, covenant headroom under any acquisition debt, and the size of the gap to plan — before deciding which kind of situation this actually is.
It is also worth sizing the response against how common a first-year shortfall actually is. ISED's own small-business data shows that even in ordinary conditions a meaningful share of Canadian small businesses exit within their first few years — “the average number of small businesses that exited annually was 16,880” in the goods sector and “57,629” in services between 2017 and 2021 — see ISED's Key Small Business Statistics 2025. A single-digit-percentage miss against an aggressive underwriting case is a normal event to plan a response to, not evidence the acquisition itself was a mistake.
STEP 02 OF 10
A director appointed as part of the acquisition owes the same statutory duty as any other under the CBCA: to “act honestly and in good faith with a view to the best interests of the corporation” and to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” — see CBCA s.122. Directors “may consider, but are not limited to” a list that includes employees, creditors and the corporation's long-term interests — no contract, resolution or by-law can relieve a director of this duty, including one negotiated as part of the acquisition itself.
STEP 03 OF 10
A weak first year frequently surfaces exactly the disputes a well-drafted purchase agreement anticipated: an earn-out payment that now falls short of the threshold the seller was expecting, a working capital true-up that looks materially different against a declining business than it did at signing, or an indemnity claim where the shortfall traces to something that should have been disclosed in diligence. Treadstone Law's own experience names this pattern directly — “working capital true-ups, earnout fights, indemnity notices” are the recurring post-closing dispute categories — see post-closing integration and disputes. Work out which of these actually applies before assuming the miss is purely operational.
STEP 04 OF 10
Where a seller rolled part of their consideration into equity and stayed on in management, a sponsor directing significant operational change needs to be alert to the oppression remedy under CBCA s.241, which lets a court intervene where conduct is “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder.” The court's available remedies are broad — including ordering a buyout of securities or varying a transaction — so decisions that meaningfully dilute or disadvantage a minority rollover holder should be made with that remedy in mind, particularly if a unanimous shareholder agreement already constrains how those decisions can be made.
STEP 05 OF 10
Where acquisition debt carries financial covenants, a miss against plan is exactly the scenario those covenants exist to flag. Approaching the lender proactively, with a credible plan and updated numbers, is a materially different conversation than waiting for a covenant breach to trigger a formal default — lenders routinely have more flexibility to work with before a breach than after one, and a documented, well-reasoned request is easier for a credit committee to approve than a reactive one.
STEP 06 OF 10
The original underwriting case was built on assumptions made before closing, some of which the first year has now tested. Build a revised plan from where the business actually stands today, not from where the original model assumed it would be — this is the baseline the board, the lender and, where relevant, a rollover minority holder all need to be working from consistently.
STEP 07 OF 10
Where the shortfall traces to a specific, identifiable cause — customer attrition, a pricing miscalculation, an integration delay — address that cause specifically rather than making broad changes across the business on the assumption that something must be wrong everywhere. A sponsor directing a turnaround should be precise about what changed and why, not reactive to the miss itself.
STEP 08 OF 10
If cash runway and covenant headroom genuinely run out despite a credible operational plan, the CCAA and BIA mechanisms are the real backstop, not a worst-case abstraction. A company under CCAA protection can sell assets outside the ordinary course only with court authorization, and a secured creditor enforcing against substantially all of an insolvent person's inventory or receivables must give ten days' notice first — see buying assets out of a Canadian insolvency for how that process actually works, from the other side of the table this time.
STEP 09 OF 10
Because the s.122 duty of care applies to every decision made during a turnaround, not just the initial acquisition decision, keep the board's reasoning for major calls — a capital injection, an operational restructuring, a decision to pursue or waive an earn-out dispute — documented as it happens. This protects the directors individually and gives the sponsor a clear record if a minority holder or a lender later questions how the turnaround was actually run.
STEP 10 OF 10
A miss against plan is common enough that a sponsor running multiple deals should treat each one as a data point about the underwriting process itself, not just about the individual business. Where the miss traces to an assumption that turned out to be systematically optimistic — customer retention, integration timelines, owner-dependence — feed that lesson back into how the next target is diligenced and underwritten, rather than treating each miss as an isolated event.
Treating a plan miss as purely an operational problem. It frequently reopens the purchase agreement's own mechanisms — earn-outs, working capital true-ups, indemnity claims — that need their own resolution alongside any operational response.
Waiting for a covenant breach before talking to the lender. A proactive conversation with updated numbers and a credible plan is a materially easier conversation than a reactive one after a formal default has already occurred.
Directing major operational change without regard to a rollover minority holder's position. Conduct that unfairly disregards a minority security holder's interests can trigger the CBCA's oppression remedy, with real, court-ordered consequences — including a forced buyout.
Assuming the original underwriting case is still the right benchmark for management. The plan needs to reset against where the business actually stands, not against assumptions the first year has already tested and found optimistic.
Treating any miss against plan as proof the acquisition itself was a mistake. A single-digit-percentage shortfall against an aggressive underwriting case is a normal, plannable event, not evidence the deal was wrong — reserve that conclusion for a business genuinely heading toward distress.
To illustrate the mechanics only — the figures are a drafting choice for this example, not a benchmark.
Scenario A. A portfolio company underwritten to $2,000,000 in year-one EBITDA delivers $1,600,000 — a 20% miss, driven largely by slower-than-planned integration of a recent bolt-on. The sponsor's board convenes within weeks of the miss becoming clear, documents a revised plan built from current numbers, proactively approaches the senior lender before any covenant trip, and confirms the earn-out threshold in the acquisition agreement — set at $2,200,000 — was not met, closing that dispute cleanly rather than leaving it open.
Scenario B. The same 20% miss, handled reactively: no board meeting is called until a covenant breach notice arrives from the lender three months later; the earn-out threshold question is left unaddressed until the seller raises it independently, by which point the relationship with a rollover seller still active in management has already soured; and the operational response amounts to broad cost-cutting across the business rather than a targeted fix to the integration delay that actually caused the miss.
The underlying miss is identical in both scenarios. The difference in outcome traces almost entirely to how quickly, and how deliberately, the sponsor's board responded once the numbers were known.
Not every miss calls for the same escalation path.
Diagnose which category applies before choosing the response — the wrong escalation path wastes time the business often does not have.
No — the CBCA s.122 standard of honesty, good faith and reasonable prudence applies at every point, not just at the original acquisition decision. Documenting the board's reasoning during a turnaround protects directors individually.
Generally yes, but conduct that unfairly disregards the minority holder's interests can trigger the CBCA's oppression remedy. Decisions that meaningfully affect a minority holder's position are worth making with that remedy specifically in mind.
When cash runway and covenant headroom genuinely run out despite a credible operational plan — at that point the CCAA and BIA mechanisms become the operative framework rather than ordinary governance and lender negotiation.
A short call can map the governance, lender and contract questions together.
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