How Much Is Your Drop Shipping Business Actually Worth?
How Much Is Your Drop Shipping Business Actually Worth?
When we’re toiling away on our drop shipping businesses, we’d probably like to know there is a light at the end of the tunnel. For most entrepreneurs, that light at the end of the tunnel should be the day when they sell their business.
If you’re brand new to drop shipping or online business in general, you might be wondering why would anyone ever sell a profitable business?
Drop shipping can be pretty hands off, especially once you outsource it. Once everything is set up, it can often be a matter of scaling paid traffic and testing out new products offers. At this point you’ve gained a multitude of skill sets from building out eCommerce stores, finding profitable products, and mastering various forms of traffic.
So why sell?
The simple answer is that people sell their businesses for a lot of reasons.
Many people want to reinvest the profits from selling their business into a new project. The new project could be another business endeavor or a reinvestment into another existing business. Some people sell their businesses so they can buy real estate property, transferring out their digital assets for physical ones. We’ve even had a seller who listed their business on the Empire Flipper’s marketplace that then used the profits to adopt a child.
Some people just want a nice big lump sum of money from exiting their business just to have it.
The beauty of drop shipping businesses over other models is that a lot of the hardships of selling a business are already removed.
For instance, unlike traditional eCommerce or Amazon FBA businesses, you have no inventory to deal with. This makes selling the business a simpler process. In addition to no inventory, you also have zero warehousing or logistics to manage. You still have customer service for your store but other than that you’re sitting at an advantage compared to more traditional ways of selling physical products online.
What kind of payday are you looking at with your drop shipping business? Just how much capital are you going to have for reinvestment into those future projects or investments (or vacations even)?
Similar to why someone might sell a business, the answer to what your business is valued at is… it depends.
How to Get the Maximum Valuation for a Big Exit with Your Drop Shipping Business
A profitable drop shipping business can sell anywhere between 18x to 36x the net monthly income. There’s a lot that determines whether it’s 18x, 36x or anywhere in between.
One of the biggest factors that determines the worth of your drop shipping business is the length of time it’s been operating. The longer it’s been around, the more valuable that business is. This factor is incorporated into our free valuation tool. We created this tool for people who want a ballpark estimate of how much their business is worth.
A drop shipping business is worth more if the majority of its traffic is from organic search and has existed for five years. That’s because It has done a few things successfully:
- It has survived multiple Google updates and is still driving a ton of traffic to the site, which means it is probably practicing safe SEO
- The drop shipping products are not “fly-by-night” or at least are around long enough to build out a long term business
- The suppliers are reliable, otherwise it is unlikely the business could survive if they are drowning in negative reviews about products.
The biggest factor for what your business is going to be worth is the net monthly income. This is income AFTER you’ve subtracted all hard expenses. Hard expenses are things like paid traffic, hosting costs, and the Shopify store. Anything you absolutely need to pay to keep the business running.
This is important to mention because not every expense is a hard expense. We are business owners, and we buy things to make running the business easier. We then put it on the business as an “expense”, when really there was no need for it.
These are called addbacks and you should be adding those expenses back into the business, rather than using them to take away from your net income. A great example of an addback expense would be buying a ticket to Thailand attend a retreat. This is not a hard expense for your business, your business did not need it to keep running, so it’s safe to assume this would be an addback expense.
Outside of net monthly income, there are other factors that increase your value:
- Email list: If your business is building out and nurturing an email list, you’re building an asset for the new buyer. The bigger the email list, the more value your business has. It is still surprising how few people focus on this despite it being common wisdom that when it comes to internet marketing, the money is in “the list”.
- Multiple Traffic Sources: If your drop shipping store is ran completely on SEO, or just one form of paid traffic, your business isn’t as “defensible” in case something goes wrong. Majority of businesses we see tend to only have one real traffic source, however it’s worth exploring multiple traffic sources. This makes your business more resilient and able to adapt, which makes it more valuable.
- Traffic: Speaking of traffic, the more traffic you have the better. The larger amount of people flowing through your website, the more valuable your business becomes.
Maximum Value Doesn’t Mean It Is Going To Be Easy To Sell
There is far more to selling a drop shipping business than just maximizing your valuation. For example, you could finish maximizing your valuation by discarding a tool or system you’d been paying for previously, so you’d show a better net income. Now your business takes you 50 hours per week to work instead of 10 hours.
No one wants to buy that – or very few people do.
People are mainly looking for a business that is as plug and play as possible. They’re looking to buy systems, not jobs. That means you should have Standard Operating Procedures (SOPS) for everything you do! This goes a long way to help a buyer have confidence in your business. For instance, If there is a repeatable process they can follow when choosing new items to offer on their website then they’ll likely be okay with the idea of having to find and test 5-10 new product offerings a month.
Don’t minimize expenses just to try and increase your net income if it takes away from the system you have built.
It’s worth more to have a little lower valuation and keep the system intact to make the business actually able to sell.
One other thing that won’t increase your valuation, but will go a long way in actually selling the business, is offering the right amount of support. Most sellers tend to offer 30 days of support via email and one hour a week of Skype calls with the new buyer. This is typically fine.
Yet, if you have a business that is using advanced strategies, such as heavy facebook advertising, where you are constantly split-testing multiple campaigns then you’ll want to really consider offering more extensive training. When a buyer sees things like this, unless they’re pretty familiar with facebook themselves, they might be intimidated by the daunting prospect of having to figure out how to run these ads successfully. If you provided 30 days of intensive training and support, along with facebook ads SOPs, and demographics then you’re likely able to lessen your buyer’s fears and they are more likely to purchase.
When To Negotiate And When To Walk
If your business is above $75k, you’ll likely need to negotiate more with your potential buyer. Bigger deals just tend to take more negotiations. As the deals creep into the $200k+ range, negotiations become even more important as various deal structuring comes into play. Deal structuring often refers to the earn out, where the buyer puts down a certain amount of money on the business then pays off the rest over the next few months.
These are important because financing in our space still doesn’t really exist. For the most part, there is zero financing options for buyers to leverage.
Speaking of price, you should be flexible on your price relative with how much your business is valued at. For example, a $200k drop shipping business should be more willing to sell that business for $195k while a $50k drop shipping business should be a little more hesitant to sell their business for $45k.
Either way, before going into negotiations with a qualified buyer, you should have some hard limits set in place. This is to make sure that you don’t overextend yourself during your chat with the potential buyer. Some hard limits to think about are:
- Hard sales price (how low will you go?)
- Hard earn out period (What kind of earn out would you accept?)
- If you do an earn out, how much of a down payment are you going to need to accept that kind of deal?
- What training and support you’re willing to offer
Write down all of these things so you can refer to it throughout your actual negotiations.
Private Deal Or Broker?
There are two real options you have when it comes to where you sell your business – either through a private deal or via a professional brokerage.
I’m a bit biased, considering I work for Empire Flippers. Despite that, you should weigh the pros and cons of private deals versus using a professional brokerage service like us.
Private deals have the benefit of the seller potentially earning more money than if they’d gone through a broker. This is because the seller won’t have to pay any commission fees. Our fee is 15%, so on a $100k drop shipping business that seller would get the full $100k rather than the $85k if he had sold on our marketplace. This is a pretty big motivator and is the main reason why people do private deals.
Unfortunately, the downside of private deals can be pretty numerous. For example, most sellers simply don’t have the buyer reach and marketing machine in place to find the qualified people interested in their business. This can lead to two situations for the seller:
- They just simply don’t receive any offers and never sell the business
- They do get offers, but it’s from people offering far below market value for their business. The seller then sells the business for far less than what they could have gotten with a brokerage due to repeat lowball offers (even when you take the 15% commission into account)
Sadly, the 2nd point happens more often than you might think.
Since the seller has no real way to qualify their buyers, they’ll get these offers over and over again and might even start thinking their business IS worth less than what the valuation we would give them. The seller being unaware of what is happening then goes ahead and sells the business for far less and is disappointed in themselves (while the buyer is probably super stoked on the deal they just got)!
Another issue is the actual migration process. How do you transfer the business over to the new buyer? Most first time sellers are probably unaware of how this process happens, even veteran sellers might find this task pretty tedious. One thing a good brokerage does is help the migration process from the old owner to the new owner – sometimes doing it completely for the seller so they don’t have to worry about doing it themselves.
Maybe the most important thing a brokerage can do for a seller though is the negotiations process.
Brokerages live and breathe deal making, deal structuring, and fielding answers that can overcome buyer objections to a business. This is a skill set that not many drop shipping business owners are going to have much experience with. That is a huge value add for them to find a buyer quickly.
When Should You Sell Your Drop Shipping Business?
We’ve gone over briefly of why people sell their drop shipping businesses, but let’s end this with talking about WHEN you should sell yours.
There are a few points to consider.
First, is the business on an upward trend with earnings and traffic? Have the earnings stabilized? Both of these are good times to sell the business. That’s because this is going to be when the business is most attractive for most buyers looking to purchase an asset.
Outside of earnings, you should do some personal soul searching here. Do you feel burnt out with the business? That is usually a good time to sell before you being burnt out can negatively impact the business. Maybe you’ve reached the business’s maximum potential? Sure, you might still see A LOT of potential in the business, but you just have no idea how to do it yourself and may be unwilling to learn how to do it yourself. This is usually a great time to sell, so that you can focus on other projects while giving the opportunity for the new owner to expand on that potential.
Speaking of focusing on other projects, many sellers will sell off their drop shipping business simply because they’re ready to invest a lot of capital into another business of theirs. This could even be ANOTHER drop shipping business that you believe might have more potential, so you sell your current one to quickly expand this other business.
We’ve seen people sell their business and use the funds to grow their new project, trade in their digital asset for a physical asset such as real estate, and we’ve even had a seller that sold their business so they could adopt a child.
It comes down to YOU.
Do some soul searching before you list your drop shipping business on our marketplace or decide to sell.
Are you ready?
If you are, then you might be seeing a pretty big payday coming your way when you do exit your drop shipping business.