Sustainability of the LBO Business
While the ratios spell financial success for a large number of the LBOs, sustainability must be viewed through additional lenses. This means looking into other data points and issues, such as: how many LBOs are still actively involved in the business? How many have dropped out of the project and how many have sold off their business altogether? What stands out in the profile of the active versus inactive group? What are the different categories making up the inactive group? How many have reached breakeven?
CURRENT STATUS OF THE LBOs
Even after reaching the breakeven point, not all LBOs continue selling. In fact, from among the 246 LBOs who have reached breakeven, only 50% have continued selling to date, while the remaining 50% have opted out. However, this does not mean those who have stopped selling have done so as soon as they reached breakeven. However, it does show that even after turning a profit, many LBOs eventually stop selling.
An ‘active’ LBO is one who has made a sale in the past 6 months (as of October 2014), while an inactive LBO has no recorded sale in that period. Currently, out of the 329 LBOs, 138 (42%) are active while 191 (58%) are inactive.
In fact, it is quite evident that a large number of ‘successful’ LBOs (businesses with commendable achievement in sales and a high monthly profit) are currently inactive. Thus good sales and high profit margin are not necessarily the right indicators guaranteeing sustainability. Of course, the majority of the inactive LBOs are the ones who have gone out of business due to poor performance in sales. Roughly put, around 30% of the inactive LBOs have been doing very well when they decided to discontinue for various reasons; the remaining 70% have done poorly overall and it made more sense for them to stop and look for some line of business that would be more financially rewarding.