Selling a vertical SaaS platform in Canada

In a small industry, customers may know each other and the industry association may know the founder, so word that a vertical platform is for sale could reach a reference customer before the first buyer has signed a confidentiality agreement. The paper behind the business may be scattered as well: code written by people who may never have signed anything, connections to other vendors’ systems governed by those vendors’ terms, and customer records that may belong to the customers under their contracts rather than to the platform. This guide sets out a suggested order of work, what each step is for, and points to check before closing.

Settle who owns the code before anyone asks

Under the Copyright Act the author of a work is its first owner, and an employer is first owner of a work an employee made in the course of employment, unless there is an agreement to the contrary. That employer rule is tied to employment, so it does not by itself cover a contractor, or a founder who wrote software before the company existed. An assignment of copyright is valid only if it is in writing and signed by the owner of the right or the owner’s duly authorized agent, and moral rights cannot be assigned at all; they can only be waived, and an assignment of the copyright does not by itself waive them. For a vertical platform the connectors are a place to look first if outside developers were hired to build the links to the industry’s other systems. List everyone who wrote code, find the paper, and get missing assignments and waivers signed while those people are still easy to reach. The glossary entry on IP assignment is a starting point.

Read the partner and integration agreements first

The agreements that tie the platform to other businesses can stall a sale, so read them before telling anyone. Three kinds matter: the terms under which the platform connects to the industry’s main system, which may restrict who can use the connection; the association or reseller agreements behind new business, some of which may need the partner’s consent to transfer; and the customer contracts themselves. For each, look for the assignment clause and any change-of-control wording. The glossary entry on the assignment clause explains the idea. Then decide with your lawyer who should be approached and when.

Control what customer data bidders see

A vertical platform may hold personal information about its customers’ own clients, patients or tenants, and whether the platform may show it depends on its customer contracts and on privacy law. PIPEDA lets organizations that are parties to a prospective business transaction use and disclose personal information without the individual’s knowledge or consent if they have an agreement requiring the recipient to use and disclose it solely for purposes related to the transaction, protect it by security safeguards appropriate to its sensitivity, and, if the deal does not proceed, return or destroy it within a reasonable time, and the information is necessary to decide whether to proceed and, if so, to complete the deal. That route does not apply to a transaction whose primary purpose or result is the purchase, sale or lease of personal information. Quebec’s Commission d’accès à l’information explains that Law 25 has its own business-transaction exception, available under certain conditions, and requires a privacy impact assessment before personal information leaves Quebec. One approach is to show structure, aggregates and redacted contracts, and hold live end-user records back until a buyer is close to closing.

Disclose in stages and keep the customer list for last

BDC warns that, depending on a listing site’s confidentiality procedures, word could get out to employees, customers or suppliers that a company is for sale. For a vertical platform the customers are also the future references of whoever buys, so one approach is to release information in layers: an unnamed description, then financial summaries under a signed confidentiality agreement, then redacted customer detail, and the unredacted customer list and reference calls only to a buyer with an agreed letter of intent.

Choose the structure with the contracts in view

Whether the buyer takes shares or assets affects how much paperwork has to be redone. In a share sale the company generally keeps its contracts, though change-of-control wording may be triggered. In an asset sale contracts have to be assigned or replaced, which can give counterparties a say depending on their assignment clauses. The CRA notes that a seller of a business may be able to elect jointly with the purchaser so that no GST/HST is payable on the sale (the CRA lists supplies on which tax is still charged), but not where only one or more assets are sold or where a registrant sells to a purchaser who is not one, and that a capital gains deduction may be available on qualified small business corporation shares. The entries on an asset sale and a share sale set out the difference; whether either tax point applies is a question for an accountant.

Points to check before closing

• A contractor who wrote a connector and cannot be found, or will not sign an assignment
• A partner or association whose consent is needed and who was approached late
• Customer contracts that restrict assignment, discovered only after the price was agreed
• A breach record that omits an incident; the Office of the Privacy Commissioner says PIPEDA requires an organization to keep a record of every breach of security safeguards involving personal information under its control
• Subscription revenue that turns out to include project fees, found when the buyer rebuilds revenue by customer
• A founder with no transition plan, since BDC notes buyers may insist on a reduced price if the seller cuts all ties