The Xero Limited (ASX: XRO) share price is rising this morning after the software company announced the acquisition of Waddle, a cloud-based lending platform.
Who is Waddle?
Waddle was founded in Sydney in 2014 and operates as an invoice financing add-on for major accounting platforms like Xero, MYOB and Quickbooks.
For those unfamiliar, invoice financing is a type of business loan that’s secured by outstanding invoices. It’s a way for businesses to borrow money against amounts due from customers, helping to improve cash flow and working capital.
According to Xero’s ASX release, Waddle’s lending platform service allows a range of banks and fintechs to more easily lend to small businesses by leveraging their accounting data and automating many of the manual processes typically involved in invoice financing.
Waddle has existing agreements with banks and lenders in Australia and the UK. Alongside its core lending platform, Waddle also operates a small direct lending portfolio, which Xero said is used primarily for development purposes.
Why is Xero acquiring Waddle?
Xero said the acquisition aligns with its strategy to grow the small business platform and address critical small business financial needs. Waddle’s cloud-lending platform, combined with small business’ invoice data, will enable the delivery of tailored invoice financing solutions.
Post-acquisition, Xero noted it will continue to explore how to facilitate small business access to capital, beyond invoice financing.
In the meantime, the company believes the acquisition positions Xero to partner with lenders globally to better serve small businesses’ working capital and other financial needs.
Waddle has been a Xero ecosystem partner since 2016 and will continue to offer services to customers and partners, including other accounting software providers.
“The acquisition of Waddle is an important step in our strategy to help small businesses better manage cash flow and gain access to working capital. Waddle’s lending platform has the potential to enable a wide range of banks, fintechs and other lenders to better support small business financial needs. We’re excited about the benefits Waddle can bring to many of our customers and banking partners.”
Xero CEO Steve Vamos
Terms of the deal
Xero will pay an upfront cash payment of $31 million for Waddle, as well as subsequent earnout payments based on product development and revenue milestones.
Combined with these earnout payments of up to $49 million, the total potential consideration for the purchase of Waddle is $80 million.
Xero expects earnout payments to be settled 50% in cash and 50% in ordinary Xero shares. For some context, Xero ended FY20 in a net cash position of NZ$111 million.
Subject to the satisfaction of closing conditions, Xero anticipates completing the acquisition before the end of 2020. The company expects that the transaction, integration and operating costs will have minimal impact on Xero’s FY21 EBITDA.