The ReadyTech Holdings Limited (ASX: RDY) share price is up more than 6% at time of writing after announcing two new acquisitions today.

ReadyTech is a leading provider of software as a service (SaaS) technology managing the complex human journey through study, work and career transitions. ReadyTech provides people management software to approximately 4,000 customers in the education and training sector including tertiary institutions, HR departments and government agencies.

The 2 Acquisitions

ReadyTech acquired leading payroll and workforce management software and services businesses, Zambion and WageLink, for a combined total of $12 million. Just over half of the payment is deferred pending and subject to Zambion meeting recurring revenue targets.

ReadyTech’s management expect the acquisitions to be immediately earnings accretive in FY20 on a pro-forma basis excluding transaction and integration costs.

Zambion is a leading web and app-based payroll and workforce management software company with a customer base in Australia and New Zealand. ReadyTech has paid $4.2 million upfront to acquire the business with a further $6.3 million deferred until revenue targets are met.

WageLink is an outsourced payroll managed service provider based in South Australia which has been acquired for $1.6 million.

The combined purchase price represents a valuation multiple of 7x forecasted FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) and 4.6x FY21 EBITDA, assuming the revenue hurdles are met and payment is made in full.

The initial upfront payment of $6.3 million will be made from available cash on the balance sheet with future payments, subject to Zambion meeting revenue targets, to be paid either from cash or via the issuance of more shares.

Management Comments

ReadyTech CEO Marc Washbourne believes the acquisitions are strategically compelling for ReadyTech allowing it to accelerate its growth in the employment segment.

Commenting on the acquisitions Mr Washbourne said, “Both Zambion and WageLink are high quality businesses, providing over 480 clients with leading payroll and workforce management software and services with loyal customer bases exhibiting strong satisfaction and advocacy.”

In addition the acquisitions deliver incremental recurring revenue adding to ReadyTech’s existing strong subscription revenue streams.”

Market Reaction And My Thoughts

Investors have given the acquisitions the tick of approval sending the ReadyTech share price 6% higher in morning trade. The share price still sits 17% below its all time high of $2.15 which occurred earlier this year.

I think ReadyTech looks to be an exciting prospect within a space with huge potential for growth. As they continue to scale up via further acquisitions I’m wary that they are likely going to need to tap shareholders for more money. I’d like to see them take a somewhat cautious approach to building the business, keeping a lid on debt and limiting the need for dillutive capital raisings.

I won’t be rushing to buy shares just yet but will keep a close eye on the company’s progress going forward.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

At the time of publishing, Luke has no financial interest in any companies mentioned.