I’m going to take you through how to buy a dropshipping store and at the end I’m going to tell you the number one mistake people make when buying a dropshipping store and how you can avoid it.
1. What is Dropshipping?
As defined by Shopify, dropshipping is an order fulfillment method where a business doesn’t keep the products it sells in stock or a warehouse. Instead, the seller purchases inventory as needed from the manufacturer. So the standard order of operations is that a customer will buy a product on the business owners site and then the supplier, for example that might be in China, will send the product directly to the customer rather than going to a warehouse that the business owner owns in their country.
2. Is It Worth it to Buy Dropshipping Stores?
The dropshipping model is a great model when starting an online DTC business as it means the owner doesn’t have to invest heavily in thousands of dollars of stock. This massively reduces the financial risk for the business owner. Once the business owner has successfully operated the business and turned a profit as a dropshipping store they usually move to a 3PL (third party logistics) model. The 3PL model will mean your cost of buying the product will decrease as when dropshipping you are buying only one product at a time. When buying 50, 1000 or 10,000 pieces of product at a time the supplier will give you large discounts leading to greater profit margins for you.
3. Buy Dropshipping Store: Step By Step Guide
4. How To Buy a Dropshipping Store: Risk Profile
Dropshipping provides a low risk way to test if the product you chose is something that will work as a business. Furthermore, you could spend 3-4 months trying multiple products to see which works and spend thousands of dollars on finding product market fit, or buy a dropshipping store from someone that has already done all of this hard work.
5. Premade Dropshipping Stores For Sale
This is the main reason to buy a dropshipping store. They’ve done the hard yards in testing and trying products and finding marketing channels that work and are profitable. You can save 6-12 months and tens of thousands of dollars in simply acquiring a dropshipping store.
6. Buy Existing Shopify Store
The first choice you need to make is whether you want to use a buy side broker or try buying a business on your own.
A buy side broker service, like the Elite Acquirers service that Ecommerce Brokers provides, brokers can walk you through the whole process of searching, vetting and closing an acquisition. To learn more about this service follow the link in the description below. The most time intensive part of buying a dropshipping business is the searching and sourcing part. This is something that a buy side broker can do for you usually for a small upfront amount and a success fee on the successful acquisition price. They will review all the brokerages, marketplaces and most importantly they will actively search for your business by reaching out to business owners, meaning they are accessing deals that no one else on that market has seen.
Alternatively you can search marketplaces and brokerage websites.
6. How Much Does a Dropshipping Store Cost?
When buying a dropshipping store I would do so with the mentality that you want to start a business but want to skip the 6-12 months needed to validate the product and market. Businesses that are worth $50,000 USD to $100,000 USD are businesses that have validated their products but are also not too big that they are overpriced. This is the range I would stick to, or lower.
7. How Old Should a Dropshipping Store be?
At a minimum I would say that you shouldn’t buy anything that’s younger than 6 months old. These sort of dropshipping stores usually are one hit wonders and only make sales over a month or two then peter out into nothing. That being said, when you get past the 6 month mark the business usually has some consistency in sales. At a maximum I would say you don’t want to buy past the 2-3 year mark as this will mean the business hasn’t scaled and will likely mean the business doesn’t have too far more to go. Remember we are looking for validated businesses that we can buy and then scale up. So we’re looking for a phase that the business is in more than anything so that you can take it to the next phase. That phase is usually 6 to 18 months when it comes to age.
8. What to Look For In a Good Dropshipping Store?
After the age of the business nothing really is as important as the profitability and stability of profitability in a business. Consistent profitability above 10% is what you’re looking for. Ideally above 15% and with a dropshipping model it really should be in the 20%+ region as margins should be better because of no 3PL and heavy inventory costs. If the business is using a dropshipping model and is struggling with profitability it will likely suffer much more when you take it on and try to move it to a 3PL model.
Consistency is important too. If a business’s sales graph looks something like the below then it is a huge red flag you want to identify and move away from.
This sort of a dropshipping store is something that has been validated but is not one you want to buy as it likely was a fad product and the store wasn’t run to be kept for a long time, but rather to make some quick money.
The below sales graph is what you want to be looking for as it shows a consistent uptrend.
9. How Do You Analyze a Listing?
So you’ve opened a few tabs on your selected sites or your broker has sent you a list of stores to take a look at. Now how do you find out if this is a store you want to buy?
If you have a broker this is definitely something they can help you with. If not the first thing that you want to take a look at is the profit and loss sheet. You want to make sure that there is consistency throughout the reporting and that there aren’t any big expenses that aren’t accounted for. By the same token you want to make sure that if there are large increases in sales you know what the reason is so you can replicate that in the future. When analyzing the profit and loss sheet you want to identify if there are unnecessary expenses and if you were to operate it, could you improve the profit margins.
Other than the profit and loss sheet you want to see if there is any defensibility around the store. What that might look like is a trademark on the brand name, a license agreement or a supplier exclusivity agreement, although the latter is a rarity for dropshipping stores.
10. How Do You Communicate and Do Due Diligence?
So you’ve analyzed the listings and now you know which ones you’re interested in. The next step is to contact the sellers and negotiate on price, terms and to gather more information. The negotiation is really where a broker works for their money. At Ecommerce Brokers we average 20-30% discounts on acquisitions for our buyers and more importantly negotiate vastly superior terms such as seller financing or earning out up to half the valuation price.
After you’ve settled on a price and terms it’s time to start the due diligence process. This is usually preceded by the signing of a Letter of Intent. This LOI sets out the exclusive time period that the buyer has to review the details of the dropshipping store. During this time the seller must provide details on the store however it doesn’t mean the seller must sell the dropshipping store to this buyer and vice versa.
During the due diligence period the buyer should be preparing the sales agreement or asset purchase agreement with their attorney. Once drafted the seller will review with their attorney and send back their revisions. This can take a few weeks. Once the completion date is set, the buyer funds are put into escrow and the assets are transferred, sales agreement signed and only then are the funds released.
11. The Number 1 Mistake to Avoid!
So now that you know how to buy a dropshipping business, what is the number one mistake buyers make when buying drop shipping businesses?
The biggest mistake buyers make is not spending enough time digging into the financials of the dropshipping store. Sellers usually aren’t trying to deceive buyers; however they won’t show you details or proof of the businesses expenses unless you ask for it and they won’t give you answers to important questions unless you ask them. One of the best questions I’ve heard a buyer ask, consistently, is “What questions am I not asking that I should be asking about this business?”
The best way to make sure you don’t end up with a dropshipping store that has half the true profit margins that were reported is to either use a buy side broker or ask for their PayPal, stripe and other payment processor records, tax returns, receipts and bank statements. Use these documents to confirm every single expense for the dropshipping store so you can get within 1-5% accuracy to what was reported as the profit margin by the seller.
12. Is It Worth It To Buy A Dropshipping Business?
Absolutely! Buying a dropshipping business can mean you save months, if not years of testing products and marketing as well as thousands if not tens of thousands of dollars.
If you are looking to buy a dropshipping store look no further as Ecommerce Brokers is here for you. We can provide you with a free buyer consultation call and get you on track to buying your first business. Just click this link and book a time to chat.
Now I have a question for you. Which do you think is better, dropshipping or Amazon FBA? Let me know in the comments below
Author Bio: George Moulos
Forbes 30 Under 30 2020, CEO of Ecommerce-Brokers.com
I own an online M&A firm called www.Ecommerce-Brokers.com and we have 11 years experience helping buyers and sellers acquire and sell millions of dollars worth of online businesses.
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