If you’re running a digital marketing agency, you’re probably familiar with the grind of managing clients, and employees, and the endless stream of tasks to keep everything running smoothly. But what if you could transform your agency into a SaaS (Software as a Service) business? Doing so could significantly boost your profit margins and the valuation multiple when it’s time to sell your business.
In this blog post, I’ll break down how I turned my seven-figure agency into a SaaS business, the financial benefits of this transformation, and the steps you can take to do the same.
Why Transition to SaaS?
Let’s start with some numbers. If your SEO agency is growing at 50% year over year, you can expect to sell it at around 4.2 times your annual revenue. However, most agencies operate at a 10% profit margin, meaning that if you’re running a $1 million agency, your annual profit would be $100,000. With a 6X EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple, your business would sell for approximately $600,000.
Now, compare this to a SaaS model. SaaS businesses growing at the same rate can achieve valuation multiples of 7 times annual recurring revenue. On top of that, SaaS businesses typically have profit margins of 30% to 70%. Conservatively speaking, if you operate at a 30% margin, your profit increases threefold.
For the same $1 million revenue:
- SaaS Model Profit: $300,000
- SaaS Valuation (15X Profit): $4.5 million
That’s a 650% increase in sale price just by transitioning to SaaS.
How Does the SaaS Model Work?
The core difference is turning your clients into users or customers who pay for access to a subscription-based platform. This means replacing the manual work of employees or contractors with automation.
For example, my agency specializes in Google Business Profile management, handling thousands of profiles for small businesses and marketing agencies. We built a platform called Paige that automated this work, providing equal or better results than manual efforts.
Paige by Merchynt is your ultimate AI assistant for streamlined Google Business Profile (GBP) management. From responding to customer reviews to optimizing business details and generating engaging posts, Paige makes managing your GBP effortless. Save time, enhance your local SEO, and ensure your business stands out to potential customers with this powerful, user-friendly tool.
With this platform, our clients became users who subscribed to a tool instead of relying on us for managed services. This change:
- Reduced Operating Costs: Automation lowered labor expenses.
- Increased Profit Margins: SaaS tools operate at higher margins.
- Boosted Valuation: SaaS businesses are more attractive to buyers due to recurring revenue and scalability.
Steps to Transition from Service to SaaS
Here are the steps to transition from a service-based business to SaaS. Our tool, Paige, can help make this process effortless for you.
- Identify a Repetitive Service You Offer
Look for services that can be automated. For us, it was managing Google Business Profiles. So we built Paige to automate all our tasks, and we moved from being 100% hands-on to automating everything, this, in turn, helped us redirect our efforts and focus more on growing as a company. Think about tasks that take significant time and could be streamlined. - Build or White-Label a Platform
You don’t have to build a platform from scratch. Consider white-labeling an existing SaaS product like Paige that aligns with your service offerings. This is faster and often more cost-effective. - Transition Clients to SaaS Users
Start offering the platform as a subscription to your existing clients. Highlight the benefits of automation, better results, and consistency. - Scale Your Business
SaaS businesses are easier to scale than service-based models because they don’t rely on adding headcount to grow revenue.
Why SaaS Increases Your Sale Price
Buyers love SaaS businesses because they’re scalable, predictable, and more profitable. Recurring revenue models reduce risk, and higher profit margins make the business more attractive.
Let’s break it down:
- Service Business: $1M revenue, 10% margin, 6X multiple → $600,000 sale price.
- SaaS Business: $1M revenue, 30% margin, 15X multiple → $4.5 million sale price.
By converting your clients into SaaS users, you unlock higher profitability and a much larger exit value.
How to Sell Your Marketing Agency: Brokers vs. Listing Platforms
When you are ready, this is how you would sell.
You have two primary options: working with a broker or listing it on a marketplace like Flippa. Here’s a breakdown of both approaches to help you make an informed decision.
Option 1: Selling Through a Business Broker
A business broker acts as a middleman, helping you connect with serious buyers, handle negotiations, and manage the sale process.
Pros:
- Expertise and convenience: A broker can provide expertise in valuation and negotiation, manage the sales process, and navigate potential buyers. Using a broker saves you time and paperwork.
- Wider network: Brokers have access to a wider network of potential buyers.
- Higher earnings potential: A broker will push the price up to boost their commission.
Cons:
- Commission Fees: Brokers typically charge 2%–10% of the sale price.
- Longer Timeline: Finding the right buyer and closing the deal can take several months.
- Less Control: Brokers take the lead in negotiations, which may limit flexibility in the deal's structure.
Option 2: Selling on Online Marketplaces like Flippa, Business for Sale
Flippa and similar platforms allow you to list your business for sale directly, cutting out intermediaries.
Pros:
- Lower Costs: No broker fees—just a listing fee and a small success fee (usually a few percent of the sale price).
- Faster Listing Process: You can list your agency within minutes and start receiving inquiries.
- More Control: You negotiate directly with buyers and decide on the final terms.
Cons:
- Time-Consuming: You’ll need to vet buyers, answer inquiries, and handle negotiations yourself.
- Risk of Lowball Offers: Many buyers on Flippa look for undervalued businesses to flip for profit.
- Potential Security Issues: You’ll need to be cautious about sharing sensitive business information with unverified buyers.
Which Option Is Best for You?
- If you’re looking for a high-value, hands-off sale, a broker is your best bet.
- If you prefer a faster, DIY approach with lower costs, Flippa or similar marketplaces could work.
- A hybrid strategy can also be effective—start by testing the market on Flippa, and if you don’t get the offers you want, transition to a broker.
Transitioning from a service-based agency to a SaaS business isn’t just about profit; it’s about creating a business model that scales with ease and attracts higher valuations. If you’re ready to take the leap, consider building or white-labeling a platform like Paige to replace your current manual services.
Thanks and I’ll see you in the next one.
