Is a Dropship Business Worth It?

I’ve heard a lot of horror stories about dropshipping and it made me do more research about it. You see, the most common reason why people fail in this kind of business is that they fail to prepare on one of the important aspects of it. As with any business, preparation is critical and making sure that even those simple steps are taken cared of will mean the success of your business.

I visited a forum the other day and there was one guy who said his dropship business failed and he is not recommending the business model ever. He said it’s a bad business to get in to and you’ll lose money on it, no questions asked.

So I sent him a message asking him about what happened and how a supposedly good business model failed him. It turned out that he was partnered with a lousy dropshipper and he was not prepared enough to answer customer service questions. You see, with a dropship business, you still have to take care of your customers, it’s not a set and forget thing that will make you money even while you sleep.

Dropshipping is a real business with real customer interaction and real hands on experience. Of course, minus the inventory and physical stuff but all the other business aspects are still there.

During our conversation I was leading him to think about what happened and to re-assess everything and think who really is to blame about his failure. In the end, he said, you’re probably right, the business model was not the problem, I’ve always thought a dropship business would make rich, and it was me who screwed up. I’m not sure but after our conversation, I’m thinking he’s out there setting up a dropship business all over again.

So in my opinion, any business, be it a dropship business, an affiliate marketing business, or even a good old brick and mortar business is well worth it if you prepare well and you’re ready to take on the challenge. Go for it full blast, with all your heart and all your might and I’m sure everything will be perfect.

What’s My Business Worth?

Frequently, small business owners don’t stop to think about what their companies or operations are worth in value until they either get to the point of retiring and/or they have to give the business to someone else. Yet having a good perspective of what your business is worth via third party evaluation even years before the big ending, can be invaluable to helping set future direction.

A regular update of your business value in terms of fair market is critical to have in your back pocket as a business owner. Not everyone goes out in the market intending to sell their business every day, but that doesn’t stop businesses from being approached out of the blue when they are perceived as successful by bigger players. This situation is especially common in today’s tech markets. Then, of course, the question is how to respond to the offer? How about if an investor wants to get in on the action? What’s a fair value of ownership in trade for investment?

The BBC America cable channel has a wonderful show on each week named Dragon’s Den. The concept is that people who are looking for investors get a 15 minute pitch to four or five venture capitalists to sell their idea. Invariably, the VCs if they like the product offer investment for an ownership stake. The VCs have a very good idea what is a deal to them and what constitutes a waste of time. And, frequently, the people making the product pitch have no idea what their product is really worth in business terms. That’s when the VCs walk away with a 40% ownership stake for pennies. This type of poor selling is what is referred to as the down side of being in the dark, or just having just a rough idea of your business value. If you have no clue what your company is worth, you don’t have any context for making a decision.

An investor offering $1 million dollars into a growing company worth $2 million is a 50% partner. However, if the business is only worth $1.5 million then that same investor arguably gets majority control of the company just based on the numbers. That’s likely not the original intent when seeking to take on a funding partner.

On the flip side, using a company worth $1 million with no greater than 20% ownership available to an investor, only $200,000 can be targeted for growth. It might be better to take a small business loan instead and have 100% control of ownership. With no other debt, the bank would calculate a 20% loan-to-value ratio, which is very palatable to a lender.

Clearly, the above examples offer two very different strategy directions that become apparent when an accurate valuation is performed. And it’s common for many business owners going through a business valuation for the first time to go through a rough surprise versus their expectations. Much of the difference has to do with the owner’s perceived value versus what the accounting books represent. The reaction that their hard-earned work and sweat has no mathematical value is a hard pill to swallow. That’s because the energy and time involved in owning, managing, and expanding a business does not represent a usable factor in valuation. Instead, the defining factor is how much the business can produce in sales in the future.

External factors like the economy, both local and national, can sway worth projections as well. Management experience and skill are a measurable determination. The industry health the business operations in has an impact. A poor valuation may have nothing to do with the business measured internally and everything to do with outside forces.

Additionally, the frequency of valuations can have an impact on their credibility. A value-estimation should be performed when changes that impact the business occur or are expected. This can include shifts in technology, competition, the general economy/market or all of those combined.

Since business valuations are not cheap, the implementation of one should be used when it provides the most worth to the owner in terms of usable information. Otherwise, a regular valuation review every three or four years is a reasonable rule of thumb, especially in a well-established industry.

Closely held companies must have an independent valuation of their securities and assets for ensuring the successful acquisition of a business. Look for a professional corporation focused on business valuation, litigation support and valuation advisory services. You need a company with proper knowledge, experience and expertise to understand and determine the value of a company. A good company will have strong analytical and research techniques to accurately and independently determine value in today’s demanding marketplace.

How Much Is My Business Worth?

Did you ever notice that the attitude of a seller of real estate is often substantially different than the attitude of a buyer? Sellers have been known to irrationally claim their property has more value than it does, despite evidence to the contrary.

The buyer often sneers at the seller’s price, and claims the property is hardly worth buying, that the seller is crazy, and that as long as the seller thinks he has such a treasure trove, he can keep it.

Now here’s where it really gets fascinating. All buyers eventually become sellers. Some well meaning folks will display both attitudes, first the buyer’s attitude when they purchase (This property is hardly worth buying.), and then years later when they are ready to sell, they display the seller’s attitude (This property is a hidden treasure worth far more than I paid for it, and any buyer would be lucky to have it.). I love to watch and learn about human behavior, and this behavior fascinates me.

Let me bring this home to roost where the most eggs are laid. Small business owners. Many small business owners drive a hard bargain when they purchase their business. During the years they run the business, many don’t show all the income on their tax return. For example, it is commonly known that coin operated businesses are ripe with opportunities to skim coins off the top without reporting that as income. Another approach, within legal limits, is to deduct the heck out of everything and show virtually zero net income. And the Trap . . .

Is that when it comes time to sell, they want more than they can justify, because they can’t prove to the buyer it really makes all that income.

Key Point. When you purchase a business, always operate the business as though you intend to sell it to get the highest possible FMV. If you can’t prove income, you won’t get your price.