Buying a marketplace platform in Canada

A marketplace depends on two groups of people coming back to the same place to find each other. A buyer can ask two separate questions: whether that habit would survive the seller’s departure or is something the seller creates every day, and whether the buyer can take on the obligations that come with holding other people’s information and, sometimes, their money. A strong network can still be one a buyer cannot take on if the buyer cannot meet what ownership requires.

A good marketplace and a busy one are different things

A busy marketplace has plenty of activity; the question is how much of it would continue without being paid for. Signs worth looking for include supply that returns without being offered incentives, demand that arrives through channels other than paid advertising, and a growing share of transactions between pairs of participants who have dealt before and kept dealing on the platform. Warning signs include a long tail of one-time users, activity that moves in step with promotional spending, one category carrying everything, and a take rate that looks flat only because it is being discounted to keep large participants. Ask the seller to show activity with promotions switched off, and see what remains.

• What share of this year’s transactions came from participants who had already transacted on the platform?
• How much of each side was acquired through paid incentives, and what happened to those cohorts after the incentive ended?
• How many listings went unanswered, and how old is the typical stale listing?
• Which participants are on non-standard terms, and who negotiated them?
• Which tasks does a person do by hand, such as approving profiles, matching requests or settling disputes?

What the seller may not volunteer

Some of what matters may not appear in the financial statements: whether founders hand-match early transactions, personally onboard the biggest suppliers or settle disputes by phone, each of which is a service the buyer would have to staff or lose. Ask who holds the relationships with the largest participants, whether any of those arrangements are verbal, how ranking works and whether paying participants are favoured in ways users are not told about. Ask also what the platform says about itself. Badges, ratings and “verified” labels are representations to the public, and the Competition Act restricts those that are false or misleading in a material respect, so you want to know that the labels mean what users are led to think.

Ask, too, which rules govern what is traded on the platform and how the business has dealt with them; a lawyer who knows the category can say which apply.

What you have to be able to take on yourself

Some obligations may attach to whoever owns a marketplace, so a buyer should test its own position early. The federal privacy statute, PIPEDA, applies to personal information handled in the course of commercial activity, and it contemplates provincial legislation that is substantially similar, so check which regime governs each group of users. In Quebec, the Commission d’accès à l’information explains that whoever operates the business is responsible for protecting personal information, may delegate that role in writing, and must publish the title and contact details of the person responsible on the business’s website or, if it has none, by another appropriate means. Quebec users also bring the Charter of the French language, which the Office québécois de la langue française describes as requiring businesses to respect consumers’ right to be informed and served in French. A buyer who receives user information during due diligence receives it under an agreement that, for PIPEDA subsection 7.2(1) to apply, must require the buyer to use and disclose it solely for purposes related to the transaction, protect it with safeguards appropriate to its sensitivity and, if the deal does not proceed, return it to the organization that disclosed it or destroy it within a reasonable time. After closing, subsection 7.2(2) lets the parties keep using it without the individual’s knowledge or consent if that subsection’s conditions are met, which include notice to the individuals within a reasonable time after the deal is completed.

Payments need their own question. If the platform moves users’ money itself rather than leaving that to a payment provider, FINTRAC’s guidance treats payment services for goods and services as remitting or transmitting funds, or dealing in virtual currency, and explains how to check whether registration as a money services business is required. Whether a given platform is caught depends on how its payment flow is built, which is a question for counsel rather than something a general guide can settle.

Who else is buying, and what each kind of buyer has to check

Different kinds of buyer face different questions. A strategic buyer can ask how far the target’s users overlap its own, since users it already has are not new users, and it may also face competition review: the Competition Bureau says the Commissioner may review any merger regardless of size, while whether a transaction must be notified in advance depends on financial thresholds related to the size of the parties and the transaction, and on other criteria and exceptions, all set out in the Act. A non-Canadian buyer meets the Investment Canada Act, described in the Investment Canada Act review threshold for a foreign buyer.