Dropshipping Website Valuation
Dropshipping websites on average sell for approximately 1.25x-2.5x earnings.
Stores that sell a unique product, have a proprietary supplier agreement, and have a brand typically fall on the higher end of the range. Dropshipping businesses generally sell for lower multiples than traditional ecommerce business because they usually have lower barriers to entry.
Before we discuss the 5 most important value factors for dropshipping stores, I wanted to make a specific note about Alibaba dropshipping stores since we get dozens of requests to broker these.
Alibaba Dropshipping Store Valuation
If you are dropshipping products through Alibaba and drive the majority of your revenue through Facebook and Google advertising, you should expect a 0.5x-1.0x valuation multiple. These websites generally have very little brand value, zero barriers to entry, high competition, and a limited lifespan.
Alibaba dropshipping is the new “get rich quick” scheme of the internet – competition is insanely high. Once someone realizes you are doing it successfully, they will copy your model in a matter of hours. Competition increases, ad cost-per-click increases and you’re stuck looking for a new “winning” product.
5 Most Important Dropshipping Valuation Factors
- Supplier agreements
- Barriers to entry and competition
- Reliance on advertising / traffic acquisition
- Business age & financials
1. Supplier agreements
If you are dropshipping a custom or proprietary product, then you have an exclusive supplier arrangement to where the supplier is not allowed to manufacture or sell the product to anyone else. That’s great.
If you don’t own the product design, the next best thing is to have an exclusive agreement with the supplier to be the sole seller.
What’s important here is that you have something to prevent other people from using your supplier and competing with you by selling the same parts.
Exclusive supplier agreements will result in higher multiples.
2. Barriers to entry and competition
Dropshipping sites get lower valuation multiples because they are usually (not always) more easily replicated and have lower barriers to entry. Any niche which a low barrier to entry is naturally going to have higher levels of competition.
Barriers to entry are more difficult to build in the dropshipping industry, but could be: exclusive supplier agreements, brand reputation, organic traffic and search rankings, etc.
If someone can replicate your business by creating a website for $30 and opening an account with your supplier, why would somebody pay for your business instead of trying to replicate yours first? If you have a good answer to that question, you could have a strong barrier to entry, or more so, barrier to competition.
Some “secret sauce”, a high barrier to entry, etc. will result in significantly higher valuations that dropshipping websites with any.
3. Advertising spend and traffic acquisition
Dropshipping websites that are reliant upon paid advertising will result in lower valuation multiples.
If paid advertising is 100% of your business, AND you have a low barrier to entry, someone is going to try to copy your business before they shell out five or six figured to buy it.
We love seeing dropshipping businesses that have solid organic traffic, referral traffic, and a good social media following. Generating traffic and revenue outside of paid is important for getting higher multiples.
4. Business age & financials
Dropshipping businesses are prone to “running out of juice” and dying down over time. Paid advertising becomes too expensive, too many competitors enter the market, traffic is hard to get, etc.
We see a lot of people looking to sell their dropshipping stores once they realize they are on their last leg. The financial performance is an extremely important factor for dropshipping site value.
To get the highest earnings multiple, you’ll need to have year-over-year revenue and profitability growth. Stores that are on the decline will sell for lower multiples, and are also a lot less likely to have any interested buyers.
5. Owner involvement
Owner involvement is big across all online business models. Buyers are looking for something that is passive. A new buyer wants to spend their time focused on attacking new growth opportunities, not just managing the day to day of the business.
The less time that is required from the owner, the higher multiple the site will sell for. Some things to consider here if you do 100% of the work on your store is outsourcing customer service, marketing, etc.