Focusing on the Napoleonic Wars as you say, specifically the Austrians as it's what I know best, a regiment's colours were very intently cared for but obviously they can't last forever, especially when campaigning. When a standard was worn or damaged beyond repair they would simply be retired and a new one made. A regiment's colours were considered the property of the rank and file, given the greatest of respect as the embodiment of the regiment, and it was tradition that the CO would 'buy' the colours from the regular men to retire it by giving them a barrel of some form of drink, though this would be much more uncommon in the field. There was no loss of standing or espirit de corps if a standard was retired through damage - it's a sign the batallion has been fighting hard after all!

It's worth adding though that the idea that a standard would get so badly shot up that the flag itself would be destroyed is a little far-fetched. Musketry of the era isn't accurate enough to concentrate fire to give it more than a score or so of bullet holes, and solid-shot artillery of the era fired low to the ground to make use of the bounce of a cannon ball - good gun crews were trained to aim in front of there target for this very reason. The flagpole becoming broken is much more likely, but that's little more than a fancy stick and not as valuable as the flag itself.