Selling a custom software development shop in Canada

An owner who has decided to sell a custom software shop is selling a team and a set of client relationships, and a question to be ready for is whether the shop can hand them over cleanly. The slowest fixes, such as missing signatures from people who no longer work for you, come first. Client consent and confidentiality come next, because they decide when and how you can tell anyone anything. Your own role after closing comes last, but it is worth thinking through early, since it shapes the offers you receive.

Audit the paper before anyone else sees it

Start by listing every project and, beside it, who wrote the code: employees, contractors, or another firm’s staff. For each project you are looking for an unbroken chain in writing. The Copyright Act makes the author the first owner, and the employer first owner of work made in the course of employment under a contract of service, unless an agreement says otherwise. For anyone else, an assignment is valid only if it is in writing and signed by the owner of the right or the owner’s duly authorized agent (section 13(4)). Moral rights cannot be assigned, only waived (section 14.1(2)), and assigning copyright does not by that act alone waive them (section 14.1(3)), so a complete file holds waivers as well as assignments. Do this early, because closing a gap needs the author’s signature, and a developer who left years ago is not under your control.

Where you find a gap, a confirmatory assignment signed now is one way to close it, and a lawyer should draft it. The Canadian Intellectual Property Office registers assignments, and registration matters if two parties claim the same right: an assignment is void against a later assignee or licensee who gave valuable consideration without actual notice, unless the earlier one is registered before the later instrument is (section 57(3)).

Sort client contracts by what they let a buyer take

Next, read every client agreement for three things: how it treats ownership of what was delivered, whether it can be assigned, and what happens on a change of control. Those words decide which contracts can move to a buyer without the client’s say. List the clients who must be asked and the clients who will only be told. The timing of each conversation is a decision to make with your lawyer, because an early approach can unsettle a relationship and a late one can delay closing.

Control what a buyer sees, and when

Your clients are the confidential party in this sale. Their names, their systems and sometimes their customers’ personal information sit inside your files, so one way to manage this is to share a redacted contract set early and the full set only after a signed confidentiality agreement. Personal information needs separate thought. PIPEDA lets organizations that are parties to a prospective business transaction use and disclose personal information without the knowledge or consent of the individual if they have an agreement requiring the recipient to use and disclose it solely for purposes related to the transaction, to protect it with appropriate safeguards, and to return or destroy it within a reasonable time if the deal does not proceed, and the information is necessary to decide whether to proceed and, if the parties proceed, to complete the transaction (section 7.2(1)). This is in addition to the other consent exceptions in the Act, and it does not apply to a transaction whose primary purpose or result is the purchase, sale or other acquisition or disposition, or lease, of personal information (section 7.2(4)). If the transaction completes, further conditions apply, including notice to the individuals. Quebec’s private-sector law has its own rules for communicating personal information for a commercial transaction, which the Commission d’accès à l’information lists among Law 25’s main changes. The data room preparation checklist covers the rest.

Have your breach record ready

A buyer may ask about security incidents, and PIPEDA gives them something concrete to ask for. An organization must keep a record of every breach of security safeguards involving personal information under its control, whether or not there was a real risk of significant harm, and must report to the Privacy Commissioner and notify individuals where there was one. The Office of the Privacy Commissioner says that where an organization has handed personal information to a processor, the organization that transferred it is reasonably treated as keeping control for breach purposes, but control is assessed case by case, and a processor that uses or discloses the same information for other purposes is acting as an organization in control of it. For a shop that works inside client systems, work out which side of that line each incident sat on before the buyer asks.

Decide your own role before the offers arrive

The owner’s departure can affect the price. The BDC notes that buyers may insist on a reduced price where the seller cuts all ties, and it lists vendor financing, an earn-out, a phased transfer of ownership and a role as an executive, board member or advisor as ways a seller can stay involved. Where clients deal mainly with the owner, a handover period in which they meet the new owner may be part of what is being sold. A buyer who wants the team may also ask which developers are essential and whether they have been told; the buyer’s side of that question is covered in how to keep key employees after a purchase.

What can hold up a closing

• A former contractor who must sign a confirmatory assignment and cannot be found, or will not sign without payment.
• A client whose consent is required and who is slow to give it, or who treats the request as a chance to reopen the commercial terms.
• A fixed-price project in dispute over whether the deliverable was accepted.
• Security incident records that were never kept in one place, so the shop cannot show what it assessed and decided.
• A lead developer who learns about the sale from a rumour rather than from you.