Dropshipping can be an efficient and lucrative way to run a business. The dropshipping business model involves a company selling a product, but that product is then made and shipped from a different factory or location (supplier) and they send it to the customer directly.
You keep a good profit while the actual manufacturing and shipping side of things is handled completely by the supplier.
An example of this might be advertising a product on Amazon, having that product manufactured by a factory in China, and then using FBA to send the product to the customer.
Dropshipping has gained popularity because of the potential for huge profits, but there are a lot of skills that need to be learned to set up a reliable and profitable dropshipping business.
Where To Buy A Dropshipping Business?
The two major options for finding a dropshipping business to buy are going via private sale or going through an online business broker.
Private Sale vs Broker
One of the obvious advantages of going with a broker when looking for a dropshipping business for sale is that the brokers (marketplaces) will have listings of already built dropshipping businesses that the owners are looking to sell.
One of the major downsides is that these owners go through a broker because they believe that’s where they can get the best price. Bidding against others can result in the price being ramped up.
On the other hand, finding a dropshipping business that isn’t listed publicly anywhere can be a bit of a challenge. Negotiating a better price might be more likely, but there will be more legwork to locate the business and open communications about selling.
Looking at online forums and having a web presence that states your interest in acquiring online businesses could help with getting more leads.
Best Marketplaces For Buying A Dropshipping Businesses
There are many marketplaces to look for online businesses for sale. However, three marketplaces, in particular, stick out as being the best options for finding dropshipping-based businesses.
Empire Flippers is one of the largest vetted marketplaces for online businesses in the world. They have a basic vetting process to weed out scammy listings. Their search tool is also excellent, allowing visitors to filter through businesses based on multiple details including monetization.
This makes it extremely easy to see every dropshipping business for sale in the Empire Flippers marketplace with a few clicks and a search.
Flippa advertises itself as the largest marketplace for online businesses in the world. There are often dozens of dropshipping businesses listed at any given time on Flippa with a wide range of income levels and niches.
Due diligence is important as there is more junk on Flippa because of the lack of vetting, but it can be worth it when you find that great deal on an up-and-coming dropshipping business.
FE International is the third marketplace to check out when looking for the best dropshipping business options. They are one of the oldest marketplaces for selling online businesses and focus on six and seven-figure deals.
This means FE International isn’t the place to search for an inexpensive opportunity, but there is a little more reassurance of at least a stable gross profit.
Buying vs Building a Drop shipping Business
Should you buy an existing dropshipping business or build one from scratch? There are pros and cons to both methods. Let’s dive into a closer examination of each.
Benefits of Building From Zero
Building from scratch has several benefits. The first is startup expenses. There are going to be expenses with creating a dropshipping business but they are going to be much lower than buying an already functioning and profitable dropshipping business.
Aside from the cost benefits, there’s also skill acquisition. There’s no better way to learn new skills than by doing something.
Creating a dropshipping business from scratch, running into common challenges, and having to solve them personally builds up your knowledge, skills, and experience.
These skills also make a person more capable of due diligence when looking to invest in an existing dropshipping business or when hiring freelancers & remote workers to help create an effective SOP or train new remote workers so they can handle the details without your supervision.
Benefits of Purchasing an Existing Business
Why purchase a dropshipping business when so many benefits come from building one from scratch?
The first is chances of success. Many dropshipping businesses fail or struggle to break even. It can be a challenge to start from nothing and build a successful business of any kind.
Buying a dropshipping business might be expensive but if it’s established and profitable, that is profit from day one with a system already in place. That’s often much easier to maintain or improve, than starting a new dropshipping venture from scratch.
The other benefit is cash flow from month one. That rarely happens when creating a brand new dropshipping business, but purchasing one means that although there’s more upfront costs there’s also revenue and profit coming in from day one as long as you don’t disrupt the system.
Due Diligence When Buying a Dropshipping Business
Due diligence is always an important part of any business buying process. This is especially true of dropshipping businesses which can have large total revenue numbers, but also high expenses meaning the difference between total revenue, total gross profit, and total net profit can be wide.
When performing due diligence on a dropshipping business make sure to cover the following six topics in-depth.
Business Performance: Sales, Traffic & Conversions
The overall business numbers will tell a lot about the business. What are the sales numbers? How much traffic does it take to get those numbers? Is that a good, a bad, or an average conversion rate for the specific industry that dropshipping business is in?
These questions can tell a lot about the stability of the income, where there’s room for improvement, and whether or not the business meets the specific standards you’re looking for as an investor.
Customer Acquisition Channels
How does the business find customers? Did they build a website that gets a lot of organic traffic? Do they mostly use ads on Amazon? What amount of traffic is organic vs. paid vs. social?
Understanding what resources a business is using, and which they are ignoring, gives you a full picture of what growth potential actually is and where the customer acquisition weak spots are.
Design, Branding & Platform
Has attention been given to having good site design? What’s the branding of the business look like? Is it professional and high quality or does it look like a template business?
What platform is used for sales? Is it just one or several?
There are many ways a dropshipping business can brand itself, design the website and setup, and operate on one or more platforms. How the overall setup looks can make a huge difference when it comes to how attractive that potential acquisition might be.
Good reliable suppliers are mandatory to make dropshipping work. Are the suppliers domestic? International? Are there potential supply chain issues or any backup plans in place?
Finding good suppliers who are reliable, high-quality, and responsive is hard. A dropshipping business that has all these boxes checked with its suppliers is going to be a very attractive pickup.
Always, always, always make sure that the legal concerns are all covered. This can’t be emphasized enough. Make sure that legal contracts are in place, understand what both your protections and your responsibilities are if you purchase this business.
The legal concerns should never be brushed off.
How competitive a niche or industry is the dropshipping business in? Did they carve out their place as the big option in a small niche, or are they one of many competing dropshipping companies competing with one another?
Understanding the competition, how competitive (or not) the business is by comparison, will give the investor a better idea of what the business is worth to them. Or if the competition is too fierce and they need to pass.
How To Value a Dropshipping Business For Sale
Coming up with an appropriate valuation for a dropshipping business is a crucial part of the process. You need to have the tools to figure out if a dropshipping business is a good deal or a dud.
Formula for Valuations
Keep in mind that there isn’t a set valuation formula for valuing a dropshipping business the way there are with niche websites for sale or other common forms of online business.
This formula is more of a general guideline for where to start versus a hard-and-fast standard formula.
The average profit is based on the last 12-months of revenues minus all expenses (e.g., cost of goods, fees)
It is important to note that gross profits don’t matter as part of the valuation – net profits do. It’s the revenue made after expenses are taken out that are used to figure out the average monthly income.
Figure Out A Valuation Multiple
The multiple for a dropshipping business can vary wildly and depends on multiple factors. The common multiple is 18x to 36x, the range on many marketplaces is even wider.
For example at the time of writing this article, Empire Flippers has a range of 15x to 45x multiple for dropshipping businesses, with most falling in the 28x to 36x range.
Different factors that affect the multiple will include:
- Age of the dropshipping business
- Age, reliability, and reputation of the suppliers
- Source of traffic and sales
- Established branding or website
- Existence of proven SOP
Growth, Potential, and Stability
Ideally, you can find a dropshipping business that offers growth, potential, and stability. However, finding all three in one can be a challenge, especially at a good price. Sometimes the best deals come from a business that has one or two of these but has room for improvement with the other.
Is there heavy growth in the business or is it maxed out? How much potential is left in the niche or the business? Is the income stable or not so much?
These are important questions during due diligence.
End Goal – Flip or Passive Income?
What is your end goal with the dropshipping business? Knowing the answer to this question, in the beginning, is important to pick out the right types of dropshipping businesses specific to your acquisition goals.
An investor looking for passive income wants a stable proven income source. If the growth is steady or flatlined because there really isn’t any more potential for growth, that’s fine if the goal is passive income.
That’s a terrible pickup for someone looking to improve the value of the business for a future flip.
If the goal is a flip you want to see a lot of potential that isn’t tapped yet. Stability is secondary, and you would assume some control over the ability to grow the business.
A dropshipping business that is perfect for the long-term hold for passive income looks a lot different than a dropshipping business that you want to grow and flip.
FAQs about Dropshipping Businesses
There are several commonly asked questions when it comes to dropshipping. Here are the top three.
How much profit does a dropshipping product make on average?
The profit per dropshipped item depends entirely on the item and niche. According to a study by Blue Cart the average margin is 20%-30% per product although the same site admits that for many dropshippers individually the range is closer to the 15-20% range.
Based on the sales price of the item, you can do the math to figure out what the profit per product would be.
Do I need a business license for dropshipping?
Technically no, you don’t need a business license for dropshipping in most locations. However, some states or localities might have different rules and regulations.
Even if it’s not required, it’s still a good idea to get a business license for your dropshipping business.
Who are some successful dropshippers?
Dropshipping businesses offer plenty of profit potential. Purchasing an existing business is a great way to increase the chances of success and get cash flow from day one.
Just remember before making a purchase:
- Empire Flippers, FE International, and Flippa are the three major marketplaces for finding dropshipping businesses for sale
- Due diligence is crucial
- Know whether your goal is passive income or flipping from the beginning
- Negotiate the valuation numbers
- Focus on net profits, not gross revenues
Keep these points in mind and your acquisition is far more likely to be successful, whatever your long-term goals.