Hey all - OP here. I know drop shipping sites tend to illicit some curiosity (as well as a lot of skepticism) online, so I'm happy to answer any questions as honestly as I can here in the comments.
As someone who has zero experience in this area, but is curious about it for that same reason, I want to thank you for your voluntary transparency. The piece itself is also well-written and is an overall enjoyable read. I wish you all the best!
Long time reader of the site and nice to see your post on HN. Thanks for sharing everything and good luck with the sale.
Dropshipping can be a great compliment to an existing software business, offering a nice way of increasing customer lifetime value. My wife and I develop & market CattleMax, a web app for cattle ranchers to manage their herds.
A few years ago, we were approached by a manufacturer who asked if we would become a reseller for their animal identification tags. We thought we'd try it out for a few months so we setup a store so our customers could buy from us online. Several years later, business has grown beyond just our software customers and we have launched another dropship store with another manufacturer.
According to "The Portable MBA", the selling price for a business like this should be about 2X gross profits, so we'd logically expect about four price cuts before someone bites (predicting a sale at $145k).
I haven't read the Portable MBA, but a proper valuation is based primarily on the expected future profit, adjusted for risk. Past/current profit can correlate with future profit, but is not the determining factor. It is too easy to 'fudge' profit in the short term. A better approach is to base a valuation primarily on a company's average return on invested capital. For example If a company spends $100 this year, that's $100 that won't be current profit. But it should return more than $100 in the future. In fact, a company might increase their value in the same year that they have a net loss. The reason for this is simple: A company's value is not how much money it earned in the past, but how much money it will earn in the future. How reliably can a company produce future earnings? And how much are those earnings expected to be? Those are the two fundamental questions to answer.
From what I understand, the value would be based on a multiple of each traffic source and the likelihood of it standing the test of time...
SEO traffic can expect to trade at 1.5x-2x
Paid search traffic at a 6 month multiple
direct navigation traffic at a 3x-4x multiple
Also, It would be based on the previous 6 months average... Not the current year sales...
Personally, I am way to skeptical of this guy finding a buyer, and than scamming him by buying up inventory through friends and entities he creates, knowing he will get 2.5x+ on each product he buys.
The real value in this sale (which the author readily admits) is the organic traffic that he'll get from publicizing the sale. Pat Flynn did the same thing with http://www.smartpassiveincome.com/niche-site-update-new-cont.... The people reading about how to create niche sites are actually the ones bringing the most value to the author's niche site. It's a clever model for social seo.
I agree with the other sentiments here on losing the reverse auction. There's no need for it; pick a number that's objectively fair and leave it at that.
I'm trying to figure out what the incentive would be for anyone to buy this, let alone folks in HN-type circles.
Yes, technically it's an ecommerce business, but with wages and salaries (outside of the general part-time site administrator) being non-existent, I don't see how it can stay afloat. You allocated a portion of the shared infrastructure expenses with the parent company; why is a portion of your salary not also included? Surely work goes into finding and brokering relationships with the motor manufacturers, selecting opportunities, setting the vision, etc.
On paper, even if you allocated 100% of the profits to pay for a person's salary, it can barely sustain a single person. The only realistic outcome is for it to be added into the fold of an existing company that wants to get into the high-end trolling motor space as a break-even business unit. Potentially serving as a loss leader to sell other higher margin items.
This reduces your prospective buyers down to about ten in the entire country.
One thing I love in your data: tracking traffic -> revenue. Cool!
Right, so I think that's the reason why the standard Income line is replaced with Seller Discretionary Income. Since it's assumed that there is very little actual work on the new owners side, all of the income of the business becomes profit. You'd be investing 1.6-2.8x an earnings of 65k, with the assumption that 1) the business would continue growing and 2) you wouldn't have to put any work into it. If the business continues to run as is, you'd get your money back in 1.6-2.8 years and the rest would be your return.
1) The rationale behind the reverse auction isn't 100% profit based. It's the best combination of being able to be transparent (for a good case study) combined with the ability to get a good value.
The reverse auction actually prevents people from waiting until the last minute because it creates scarcity. The moment someone places a bid, the store is off the market. So for people who really are interested, they only get one chance.
2) Small eCommerce business like this usually sell for 2-3x sellers discretionary earnings, which is a term for net income with a usual exclusion for one full-time salary. The fact that a full-time salary isn't included is part of the reason they sell for a smaller multiple.
From the original post:
Currently, my operations manager, Pat, runs the day-to-day operations. He works part time and spends up to two hours per day running the operations of TrollingMotors.net. For more details on exactly what he does, please see the section on Operational Responsibilities.
When calculating seller’s discretionary earnings (i.e., income) for small eCommerce businesses of this size, wages for one person (often the owner) are usually not deducted. Given that Pat and my combined operational workload for the business is less than 15 hours per week, I didn’t include any labor costs per this normal exclusion in calculating seller’s discretionary income.
However, I realize that most people (myself included if I were you!) would want to see the financials including payments to an employee. That’s why I’ve listed below how paying an employee would impact the bottom line. This is the anticipated cash flow assuming someone else was running the day-to-day operations of the business, effectively putting the operational aspects of the business on complete autopilot.
Cost for employee wages is $15,000 / year (assuming $50,000 full-time salary paid at two hours per day), reducing the net income to $50,000 from $65,000.
You mentioned it can barely sustain one person which, if this all they did all day, may be true (depending on where you live). But the operational time involved with running the business is 2 hours per day, which leaves a lot of time to do other things. Most of the existing work has been done (website development, supplier relationships, etc) and the product line doesn't change much so the website doesn't need to be updated frequently.
Two hours a day can seem really low, especially from the perspective of the seller as I obviously have a conflict of interest. That's why I added real data points to the workload required for operations. Over the last year, averages are:
- 3 email tickets per day
- 4 phone calls per day
- Average call time of 8 minutes)
...plus some work at the beginning of the year to retrofit the website for the 20 to 30 new models that come out.
If you tried to take out a $150,000 full-time salary for someone out of the business, it obviously wouldn't make sense. But for someone who wants to get into eCommerce with a minimal amount of day-to-day work and quickly get a lifestyle business into their life, it's a much better fit.
Hope this helps clear things up, and let me know if I can answer any follow up questions. And glad you liked the traffic -> revenue chart! I think it's much more useful than simply traffic stats alone. :-)
You obviously don't visit Flippa too often. As someone who does, I can tell you that you have quite the wrong impression. Flippa is a cesspool full of people selling crappy sites at inflated prices and if you really want to get detailed info on a site, you usually have to spend hours and hours pulling it out of the seller.
Something as detailed and transparent as the auction here is a very rare exception. Not to mention that it actually seems a solid business with increasing revenue over the years. Most people sell their sites only when they start going down the drain.
Thanks for the transparency, I'll wager that this sort of behavior will become much more naturalized in the business environment at large as pre-internet behavior gradually becomes replaced with post-internet sentiment - for now it certainly reflects very positively on you and your business.
Thanks! I have a hunch that this way of selling might get more traction in the future as well. When you're selling a business, usually the more attention and publicity you get the more buyers (and higher price) you're likely to have.
There are a few things I'm not sharing (like the top selling products, for example), but for the most part, I think the advantages from being transparent far outweigh the risks.
Hey, i highly suggest getting rid of the reverse auction.
Imagine X is the highest value any bidder attaches to ownership of the site. Even if the price drops below X, the bidder has an incentive not to bid (since they can potentially wait and scoop it up at a discount). You're throwing out money.
OP here. Thought a lot about the auction structure and decided the Dutch style (reverse) was the best given my goals.
I wanted to combine getting a good value with the ability to showcase the bid/price - and the process - publicly.
If I did a normal open auction, there is a chance everyone would wait until the last minute to bid. I'm managing bids manually, so it could get hectic. Plus, it wouldn't be as fun to watch for people reading.
Also, if there were NO bids early on it would really hurt the potential sales price with a lack of interest.
A full-on closed auction wouldn't be nearly as exciting for people to watch, and I wanted to generate buzz and interest, plus show the whole process.
With the reverse auction, the bid management is simplified - I only have to manage one winning bidder. It also allows the process to be showed publicly. Finally, it creates a sense of scarcity. If someone really wants it, they'll be more likely to bid early to prevent others from getting it.
So is it perfect? Definitely not! :-) Probably leaving some money on the table but I thought that this was the best structure to maximize value AND interest.
A typical (sealed-bid) auction has the exact same problem. I value the business at X, but know that I can bid less than X, probably still win, and keep more surplus.
To give bidders the incentive to bid their true value, you need a Vickrey auction where the winner only has to pay the next highest bid. But, this is suboptimal if there isn't a lot of liquidity. Also, you won't have the credibility to do this if you are auctioning off your own business (you have an incentive to lie about the next highest bid).
Not true in the presence of other bidders, where the threat is that someone else's true valuation may be below X. This is game theory domain, and I haven't modelled it, but I'm quite confident the outcome for each player is to bid at their true valuation.
Thanks kposehn! But that is a little deceiving. Direct traffic makes up about 40% of the revenue. But about 1/2 of that is phone traffic that we get because we take phone orders via our site, which appears as direct.
So 20% is true direct traffic. But that other 20% of the total probably is originally sourced from other places (referral, search engines, etc) but they just close the deal over the phone with us.
Thank you for the awesome article and sharing the details!
One random question from looking at the charts, how do insurance/product liability for drop shipping work? Are they generally not needed or covered by someone else?
Good question. It's really a personal decision based on risk. Technically, I think consumers can go after anyone in the supply chain so, even retailers or stores. So it's not a bad idea to have.
That being said, I'd say the majority of stores don't have it....
* Why is Q4 Projected so low compared to Q1-3?
* Why are Gross and SDE Margin % falling consistently from 2011-2013?
I think one thing that pops out at me is that while most business get better margins as they scale, your margins are actually declining or stagnant, which seem to be driven by the decline in COGS.
How did you get started in this? I mean - why trolling motors? And, how did you find drop-ship suppliers for such a seemingly expensive/low volume-product?
Thanks! I picked the niche purely based on where I thought I could make money. When I started it, I had been running another drop shipping site for a few years already and wanted to try my hand in different market.
Finding drop shippers is actually a lot easier than you might think. You can't find them for every niche and market, but if you're willing to spend some time digging through Google you can usually find legitimate wholesale drop shippers without too much work. I did a video on it (see below) that might be helpful:
I will if you will offer me a 60 day options contract to sell bitcoins at a fixed price after close! Otherwise, the volatility cold double or half the purchase price. :-)
Part of the reason this is not a good business is you can't amortize advertising. ie no SG&A leverage going forward. unlikely to see decreasing marginal cost
why not post cash flow as well?
you will also get your ass kicked for posting projected financials without a series 7 & 63
Thanks for the comments. I do have a financial background, and to my knowledge companies usually don't amortize advertising. Amortization and depreciation is something reserved for large assets that have a significant upfront cost and a very long lifespan - like a building.
The benefits from advertising are usually used immediately. Buy a super bowl commercial? The benefits are definitely used up within that year, if not that week.
For a business like this, cash flow is essentially what you see on the income statement. No huge account payables (pay bills with a CC) and no non-cash expenses (like depreciation. Again, I'n not depreciating my advertising.)
Also, I do happen to have a Series 7 and 66 - but as I left the financial industry a while ago they aren't current. I could be wrong, but I don't think there's any rule that prohibits me from 1) selling my own business and 2) disclosing the financials without a license. Might be different if I was selling YOUR business for you.
If you have a financial background and/or sources for your points above, I'm very open to being corrected. Just let me know.
I'm skeptical of OP, because I remember him on reddit saying he made over six figures on his drop-shipping sites... Unless he has other successful sites, he flat out lied about his successes, possibly to sell his ebook.
OP here! This is not the only drop shipping site I run, and I talk about the others on my blog. This specific site (TrollingMotors.net) doesn't make six figures annually - that's correct. But I do have stores that do (I mention my other stores on my blog). And, of course, the combined earnings are above the six-figure mark.
Also, I don't sell my eBook - I give it away for free. :-)
[+] [-] spiredigital|12 years ago|reply
[+] [-] kohanz|12 years ago|reply
[+] [-] terrellm|12 years ago|reply
Dropshipping can be a great compliment to an existing software business, offering a nice way of increasing customer lifetime value. My wife and I develop & market CattleMax, a web app for cattle ranchers to manage their herds.
A few years ago, we were approached by a manufacturer who asked if we would become a reseller for their animal identification tags. We thought we'd try it out for a few months so we setup a store so our customers could buy from us online. Several years later, business has grown beyond just our software customers and we have launched another dropship store with another manufacturer.
[+] [-] callmeed|12 years ago|reply
I have a business I'm interested in selling–possibly in a similar manner.
I assume you'll be doing a detailed follow-up post?
[+] [-] Stwerner|12 years ago|reply
[+] [-] spiredigital|12 years ago|reply
[+] [-] smoyer|12 years ago|reply
[+] [-] JacobJans|12 years ago|reply
[+] [-] davemel37|12 years ago|reply
Also, It would be based on the previous 6 months average... Not the current year sales...
Personally, I am way to skeptical of this guy finding a buyer, and than scamming him by buying up inventory through friends and entities he creates, knowing he will get 2.5x+ on each product he buys.
[+] [-] iambateman|12 years ago|reply
4 rounds of PR ("price cut! Is it for you?) and a sale isn't a bad deal at all.
[+] [-] chstrcheeto4prz|12 years ago|reply
[+] [-] mvkel|12 years ago|reply
I'm trying to figure out what the incentive would be for anyone to buy this, let alone folks in HN-type circles.
Yes, technically it's an ecommerce business, but with wages and salaries (outside of the general part-time site administrator) being non-existent, I don't see how it can stay afloat. You allocated a portion of the shared infrastructure expenses with the parent company; why is a portion of your salary not also included? Surely work goes into finding and brokering relationships with the motor manufacturers, selecting opportunities, setting the vision, etc.
On paper, even if you allocated 100% of the profits to pay for a person's salary, it can barely sustain a single person. The only realistic outcome is for it to be added into the fold of an existing company that wants to get into the high-end trolling motor space as a break-even business unit. Potentially serving as a loss leader to sell other higher margin items.
This reduces your prospective buyers down to about ten in the entire country.
One thing I love in your data: tracking traffic -> revenue. Cool!
[+] [-] ajiang|12 years ago|reply
[+] [-] spiredigital|12 years ago|reply
1) The rationale behind the reverse auction isn't 100% profit based. It's the best combination of being able to be transparent (for a good case study) combined with the ability to get a good value.
The reverse auction actually prevents people from waiting until the last minute because it creates scarcity. The moment someone places a bid, the store is off the market. So for people who really are interested, they only get one chance.
2) Small eCommerce business like this usually sell for 2-3x sellers discretionary earnings, which is a term for net income with a usual exclusion for one full-time salary. The fact that a full-time salary isn't included is part of the reason they sell for a smaller multiple.
From the original post:
Currently, my operations manager, Pat, runs the day-to-day operations. He works part time and spends up to two hours per day running the operations of TrollingMotors.net. For more details on exactly what he does, please see the section on Operational Responsibilities.
When calculating seller’s discretionary earnings (i.e., income) for small eCommerce businesses of this size, wages for one person (often the owner) are usually not deducted. Given that Pat and my combined operational workload for the business is less than 15 hours per week, I didn’t include any labor costs per this normal exclusion in calculating seller’s discretionary income.
However, I realize that most people (myself included if I were you!) would want to see the financials including payments to an employee. That’s why I’ve listed below how paying an employee would impact the bottom line. This is the anticipated cash flow assuming someone else was running the day-to-day operations of the business, effectively putting the operational aspects of the business on complete autopilot.
Cost for employee wages is $15,000 / year (assuming $50,000 full-time salary paid at two hours per day), reducing the net income to $50,000 from $65,000.
You mentioned it can barely sustain one person which, if this all they did all day, may be true (depending on where you live). But the operational time involved with running the business is 2 hours per day, which leaves a lot of time to do other things. Most of the existing work has been done (website development, supplier relationships, etc) and the product line doesn't change much so the website doesn't need to be updated frequently.
Two hours a day can seem really low, especially from the perspective of the seller as I obviously have a conflict of interest. That's why I added real data points to the workload required for operations. Over the last year, averages are:
- 3 email tickets per day - 4 phone calls per day - Average call time of 8 minutes)
...plus some work at the beginning of the year to retrofit the website for the 20 to 30 new models that come out.
If you tried to take out a $150,000 full-time salary for someone out of the business, it obviously wouldn't make sense. But for someone who wants to get into eCommerce with a minimal amount of day-to-day work and quickly get a lifestyle business into their life, it's a much better fit.
Hope this helps clear things up, and let me know if I can answer any follow up questions. And glad you liked the traffic -> revenue chart! I think it's much more useful than simply traffic stats alone. :-)
[+] [-] staunch|12 years ago|reply
[+] [-] pakitan|12 years ago|reply
[+] [-] dingdingdang|12 years ago|reply
[+] [-] spiredigital|12 years ago|reply
There are a few things I'm not sharing (like the top selling products, for example), but for the most part, I think the advantages from being transparent far outweigh the risks.
[+] [-] grimtrigger|12 years ago|reply
Imagine X is the highest value any bidder attaches to ownership of the site. Even if the price drops below X, the bidder has an incentive not to bid (since they can potentially wait and scoop it up at a discount). You're throwing out money.
[+] [-] spiredigital|12 years ago|reply
I wanted to combine getting a good value with the ability to showcase the bid/price - and the process - publicly.
If I did a normal open auction, there is a chance everyone would wait until the last minute to bid. I'm managing bids manually, so it could get hectic. Plus, it wouldn't be as fun to watch for people reading.
Also, if there were NO bids early on it would really hurt the potential sales price with a lack of interest.
A full-on closed auction wouldn't be nearly as exciting for people to watch, and I wanted to generate buzz and interest, plus show the whole process.
With the reverse auction, the bid management is simplified - I only have to manage one winning bidder. It also allows the process to be showed publicly. Finally, it creates a sense of scarcity. If someone really wants it, they'll be more likely to bid early to prevent others from getting it.
So is it perfect? Definitely not! :-) Probably leaving some money on the table but I thought that this was the best structure to maximize value AND interest.
[+] [-] cjy|12 years ago|reply
To give bidders the incentive to bid their true value, you need a Vickrey auction where the winner only has to pay the next highest bid. But, this is suboptimal if there isn't a lot of liquidity. Also, you won't have the credibility to do this if you are auctioning off your own business (you have an incentive to lie about the next highest bid).
[+] [-] kohanz|12 years ago|reply
[+] [-] clienthunter|12 years ago|reply
[+] [-] arbuge|12 years ago|reply
Downside of that might be that the reverse auction probably generates more buzz though... here we are, on the front page of HN.
[+] [-] kposehn|12 years ago|reply
That is a fantastic asset to the site and makes it very sticky in the face of Google algorithm changes.
[+] [-] spiredigital|12 years ago|reply
So 20% is true direct traffic. But that other 20% of the total probably is originally sourced from other places (referral, search engines, etc) but they just close the deal over the phone with us.
[+] [-] fatbat|12 years ago|reply
[+] [-] spiredigital|12 years ago|reply
That being said, I'd say the majority of stores don't have it....
[+] [-] ajiang|12 years ago|reply
* Why is Q4 Projected so low compared to Q1-3? * Why are Gross and SDE Margin % falling consistently from 2011-2013?
I think one thing that pops out at me is that while most business get better margins as they scale, your margins are actually declining or stagnant, which seem to be driven by the decline in COGS.
[+] [-] kohanz|12 years ago|reply
[+] [-] OhHeyItsE|12 years ago|reply
How did you get started in this? I mean - why trolling motors? And, how did you find drop-ship suppliers for such a seemingly expensive/low volume-product?
Good luck!
[+] [-] spiredigital|12 years ago|reply
Finding drop shippers is actually a lot easier than you might think. You can't find them for every niche and market, but if you're willing to spend some time digging through Google you can usually find legitimate wholesale drop shippers without too much work. I did a video on it (see below) that might be helpful:
http://www.ecommercefuel.com/drop-shipping-wholesalers/
[+] [-] seansoutpost|12 years ago|reply
[+] [-] spiredigital|12 years ago|reply
[+] [-] tslathrow|12 years ago|reply
why not post cash flow as well?
you will also get your ass kicked for posting projected financials without a series 7 & 63
[+] [-] spiredigital|12 years ago|reply
The benefits from advertising are usually used immediately. Buy a super bowl commercial? The benefits are definitely used up within that year, if not that week.
For a business like this, cash flow is essentially what you see on the income statement. No huge account payables (pay bills with a CC) and no non-cash expenses (like depreciation. Again, I'n not depreciating my advertising.)
Also, I do happen to have a Series 7 and 66 - but as I left the financial industry a while ago they aren't current. I could be wrong, but I don't think there's any rule that prohibits me from 1) selling my own business and 2) disclosing the financials without a license. Might be different if I was selling YOUR business for you.
If you have a financial background and/or sources for your points above, I'm very open to being corrected. Just let me know.
[+] [-] testrun|12 years ago|reply
[+] [-] mrmagoo312|12 years ago|reply
[+] [-] spiredigital|12 years ago|reply
Also, I don't sell my eBook - I give it away for free. :-)
[+] [-] vpayette|12 years ago|reply
[+] [-] spiredigital|12 years ago|reply