Ever wondered how much this dropshipping business you’ve built from the ground up is worth?
Where would you get that valuation figure from?
A common mistake online business owners make is to compare their business to others for sale. They think if a business that’s for sale for $140,000 is making $4,000 net profit each month, and their business is earning the same amount of profit, it should be of the same value.
Not true.
As long as we’re dismissing myths, you should know your business’ value isn’t based on the amount of work you’ve done to grow it. In fact, that work is not even considered.
This may sound obvious, but it’s an important thing to understand so you have the right expectations of your business’ value.
Many factors do go into valuing an online business. Here are the valuation metrics that we use to determine your business’ value:
Dropshipping Business Foundations
– The business model you have
– The age of your business
– Time spent maintaining your business
Numbers
– Average monthly profit (usually over 12 months)
– Monthly or annual product subscription earnings
– Amount of traffic visiting your store
Diversity
– Number and consistency of your income sources
– Number and consistency of your traffic sources
– Variety of products
Brand presence
– Number of reviews you have and their ratings
– Your product’s replicability
– Your brand’s replicability
– How high you rank in Google for hot keywords
– Social media following and engagement
Business assets
– Relationships with your product distributor(s) and contracts
– The quality of your store’s domain
– Employee contracts
– Email list
– Business accounts for social media
The dropshipping model presents some unique ways to score higher on these metrics and get a higher valuation.
Step 1: Get Your Numbers Straight
By simply having your ducks in a row, you can make your business more desirable to buyers. This is key because the more desirable your dropshipping business is, the more you can sell it for as there will be more interested buyers.
Start with your profit and loss statement (P&L).
Assume that when a buyer conducts their due diligence on your business, they’ll dig deep into the financials. They will want to know where the business’ income is coming from and what it gets spent on.
They’ll also want to see the history of earnings. Did your business ever earn significantly less or more than usual? Why? You can guarantee a buyer will ask you this.
Your business’ financials tell its story. They are almost always the first thing buyers assess when evaluating your business as an investable asset.
While you have your calculator out, you should also tally up your inventory figures.
These are your wholesalers’ delivery times and sales capacity. These figures will give the buyer an idea of your model’s scalability as it is currently structured.
Step 2: Organize Your Processes
The more hands-off a digital asset is, the more desirable it is, as this will allow a buyer to focus on growth. This also allows them to have multiple digital assets at once, which a lot of buyers do.
The dropshipping business model is hands-off by design except for customer service, website maintenance, and marketing. However, if you’re doing paid advertising, you want your marketing funnels to be as organized and automated as possible. If employees, such as a virtual assistant (VA), handle any aspect of operations, such as customer service, you want to make sure their working procedures are efficient.
Make sure any tasks you personally do to maintain the business are as efficient as possible.
Once you have your processes down pat, you need to document them.
Creating standard operating procedure (SOP) documents is a must when preparing your business for sale. If the buyer can walk into the business already knowing how everything works, it becomes a more appealing investment.
Step 3: Work Your Vendor Relationships
The more solid your vendor network, the more stable and scalable your business will be.
If you’ve been working with a reliable vendor for a long time, you can build on that relationship.
Most e-commerce business owners don’t dare ask their vendors for better rates, so they pay too much for inventory. If you’ve been consistently making a high number of sales for the vendor, you are in a good bargaining position to ask for a better rate. A reduced rate would increase your margins, and even a small increase could result in a high amount of extra profit.
If you’re competing for sales with other sellers using your vendor, you can propose an exclusivity agreement. The benefits to the vendor are that they secure a reliable source of income, it is easier for them to supply products to one store, and they can provide a higher volume of the products for your store and potentially make more sales if you have the level of demand.
To prepare your business for any potential logistical issues, you should sell a variety of products supplied by multiple vendors. This makes your business stronger and helps keep sales consistent because if one vendor cannot supply a product, you can rely on the sales of other products you have with other vendors for income.
Step 4: Diversify
We always preach diversification for online business for a similar reason: mitigating risk.
The three main diversification areas for e-commerce are:
- Traffic
- Income
- Products
You should have as many traffic sources as possible. That could mean using Google as a main channel with organic traffic from Facebook and Pinterest as supplementary channels, or it could mean using paid advertising as a traffic source.
In whatever channels you have brand presence, make sure you’re driving traffic.
Speaking of brand presence, this is also a valuation factor we consider. The more authoritative your business is in its niche, the more market share you will hold, and the more valuable your business will be.
As for income, you can supplement your dropshipping earnings by expanding into other monetizations.
For example, you could source your own products and sell them in your already-established store. For instance, you could sell a product you have sourced and use your current dropshipping products as upsells to encourage larger cart purchases.
Another way to diversify your income is to host display ads on your site. This is a great way to make more money as it requires no maintenance on your part. You just add a piece of code to your site and Google, or whichever advertising platform you use, handles the rest.
The advertising platform is paid by the advertiser every time one of your store visitors clicks the ad, and you’re paid a percentage of this by the advertising platform.
Weirdly enough, users tend to consider adverts a trust factor, so having them on your website could help improve trust in your brand!
Expanding your product range is another quick way to increase your business’ value. This presents a growth opportunity for a buyer, and it makes your business less risky, as its income relies less on a few products or even a single product selling well.
Final Takeaways
There are short- and long-term ways to increase your dropshipping business’ value. A business that has grown a huge brand presence, controls a large share of the market, and makes a lot of sales will have a high value even if the dropshipping business requires a lot of maintenance.
But those valuation factors take a long time to build.
We’ve discussed some of the short-term ways to increase your business’ value in this article: expanding your product line, putting ads on your site, and creating or improving your P&L are probably the quickest wins.
Think about what would make your business easier to run and what would create a growth opportunity. These are the two factors buyers consider most, outside of profit and business age.
That said, some buyers actually look for businesses with blemishes.
For example, if you’re paying high vendor fees, a buyer who understands this aspect of dropshipping could find a new supplier and quickly increase profits.
So don’t be concerned if your business isn’t perfect; there is likely a buyer for it out there.
Once you’ve followed the steps above to increase your business’ value, head to our website and submit your dropshipping business for sale on the world’s largest online business marketplace. We have a pool of buyers who collectively have verified funds of over $900,000,000 ready to invest (this will probably have risen to over $1 billion by the time you see this article).
Guest Author
Craig Schoolkate is a Content Specialist for Empire Flippers; the leading M&A brokerage with the world’s largest curated online business marketplace. He produces content on e-commerce topics, including DropShipping and Amazon FBA, and he interviews sellers of DropShipping businesses for the Real Money Real Business podcast. Outside of Empire Flippers, Craig likes to travel and socialize with friends.
