How Much Should I Pay for a Dropship Business?

How Much Should I Pay for a Dropship Business?

The process of valuing a dropship business is not all that different from the process of valuing any other business.  In simple terms, a dropship business today would be worth the present value of its future cash flows.

In order to obtain this figure, you would need to estimate future income that the dropship business would generate and discount them by the expected rate of inflation that you anticipate affecting the money (compounded appropriately for future years).

Why Would Someone Sell a Dropship Business?

My mother warned me to be cautious about people selling used things.  She would often buy them herself, but not after engaging in fierce devaluing/negotiation tactics.  She told me that there was always a reason that someone was selling something.  She’s right – there is a reason.  No one ever sells anything out of the goodness of his/her heart – that we would call charitable giving.

It is good to try to ascertain – either through overt or covert methods – the reason for the sale of a dropship business.  Perhaps the project has become too much for the proprietor (who doesn’t know as much as you do about dropshipping)..perhaps he/she took a full-time position..perhaps the website generates consistently low levels of traffic (an obvious red flag)..perhaps the site’s traffic cannot be monetized.

Valuing a Dropship Business

• First of all, you should ask for financial documents, including a profit and loss statement – also called an Income Statement.  This is a financial statement which indicates the revenue, expenses and net income (or loss) that an organization reported for a given period of time.  Get income statements (either in tax return or audited format, if you can – to ensure some level of third-party validation) from the last three years, if available and use these to predict future income and expenses.
• Make sure you verify the Domain Owner, Domain Age, its Traffic Rank, Traffic Characteristics in order to validate the seller’s claims about the domain’s value.

After you have gathered the inputs and calculated a number that you feel like is justified in paying for the website, keep it private!  Start (anchor) yourself lower, and begin negotiating.  Best of luck!

Can’t I Just Buy A Dropship Website?

The recent words of one of our readers echoed the sentiment of many:

Dear Dropship Advisor,

The more I learn about the nature of a dropshipping business, the more I am daunted by the process.  I want to start a baby products store.  Can I just buy an existing ecommerce website with existing dropshipping wholesalers?

-ECommerce Exhausted

Dear ECommerce Exhausted,

This is certainly a valid question and one that has a lot of merit as dropshipping grows and matures.  Just as with any other type of business, you can either build a dropship business from the ground up or you can purchase an existing business from someone who is getting rid of one.

There is a growing market for the sale of dropship websites and other e-business on sites such as Flippa, WebsiteBroker.com.  There are many other marketplaces for dropship websites online, but these are some of the more prominent ones.

Also, check Craigslist, Backpage, Kijiji and other directories for eCommerce and dropshipping-related business advertisements.  These websites get quite a bit of traffic from web-savvy entrepreneurs (like yourself..).

When you find a dropship website that you are interested in learning more about, make sure to ask the seller a lot of questions.  I got a bit exhausted trying to understand why so many people are selling so many ‘profitable, easy-to-maintain’ websites..doesn’t quite add up.

Make sure you get:

-Satisfactory reasons as to why the website is being sold
-The age of the domain
-The existing hosting information
-The shopping cart information
-The nature of dropshipping relationships (including wholesale cost, shipping arrangements, marketing restrictions, etc.)
-Financial statements (profit and loss statements for the lifetime of the business; the past three years if the business has been around for a long time)
-Better Business Bureau information – do a BBB.org check on the domain and ensure that no outstanding grievances have been filed against the company

If the seller has provided this all to your satisfaction, proceed.

Part 2 – Price Negotiations Coming Tomorrow.

-The Dropship Advisor