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6 questions to ask before selling your treatment center

October 26, 2016
by David Raths
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A few years ago, after spending decades building an outpatient addiction treatment practice in Bergen County, N.J., Gary Rosenbluth tried to cut his hours back a little, but had trouble relaxing enough to take advantage of free time. When executives from Post Acute Recovery, LLC (PAR) contacted him about acquiring his practice, they talked to him about the idea of leaving a legacy.

“That word stuck in my gut,” Rosenbluth says.

Merging with PAR “gives me the opportunity to leave a legacy and help support more people,” he adds. In September, Rosenbluth closed the deal and sold his practice to PAR. It will be known as North Jersey Counseling Services and becomes part of the PAR network.

Behavioral health providers such as Rosenbluth are increasingly fielding offers from larger providers and private equity firms that are trying to get a foothold in the market and drive consolidation.

“There has been a sea change in behavioral health in terms of the increase in acquisitions,” says William Bithoney, MD, chief physician executive and managing director in BDO Consulting’s healthcare advisory practice in New York City.

Among other factors, he cites the Mental Health Parity and Addiction Equity Act and the expansion of Medicaid, as well as low interest rates, which is a huge driver of merger and acquisition activity.

“The last time I looked, no single provider had more than 1% of the market in behavioral health,” Bithoney says. “That means the opportunities for roll-ups and potential for efficiency gains are incredible.”

As these acquisition offers become more commonplace, what issues do treatment center owners have to take into account to make sure the process goes smoothly, with as few surprises as possible?

 

1 What are your priorities?

Tom Schramski, president and managing partner of Tucson, Ariz.-based Vertess, says some practice owners begin the conversation talking about multiples of their EBITDA — Earnings Before Interest, Taxes, Depreciation and Amortization.

“That is the wrong place to start,” he says. “I ask owners to tell me what they are trying to accomplish personally and professionally. Once we figure that out, that is what guides you. If you want a certain amount for your business, I may say it is not time to sell yet.”

He recommends work to clean up financials and make the business more efficient. Some growth might be necessary to get the amount you want, but it might take 12 months to get there, he says.

The idea is to think not just about the transaction, but about what precedes that: building value that a buyer can see.

“People will say, ‘Don’t they understand how hard I worked, the blood, sweat and tears?’ The answer is they can appreciate it. But are they going to give you money for that? Not necessarily,” Schramski says.

2 Are you staying?

Among the first decisions to make is whether the seller wants to stay with the practice. Often the buyer wants the seller to be involved, Bithoney says. If the answer is yes, a series of other questions for the seller follow from it: Can the buyer help us comply with federal and state reporting requirements and electronic health record implementation? How can they assist us with access to clinical specialists we don't have? Can the acquirer integrate us with primary care?

Robert Ryberg, managing partner at Peak Consulting Partners in Evergreen, Colo., says the most successful deals he has seen involve the founder of the practice staying with the organization and working through any issues around blending cultures. Deals where founders have a short-term goal to exit within three months or six months are not as successful, he says. If the founder isn’t interested in staying, it can lessen the interest of buyers in completing a deal. 

“Sometimes the buyer ties compensation to performance in helping them transition, so it is a partnership for growth,” he adds. “They might keep you in a minority position of 10% or 20% and then do an earn-out structure over the next year, so you are incentivized to grow the business.”

3 What is the best cultural fit?

Understanding the motivations and culture of the buyers is key to any deal, says Rosenbluth. If the buyer is focused on delivering on a mission to help individuals with behavioral health disorders, that trumps any financially driven enticements.

“It is not about the money. It is about helping people, and indirectly you make money,” he says.

 According to Ryberg, there are situations where a seller might not take the highest offer because they appreciate the culture of a different buyer. It’s a legitimate variable to consider.

Cultural fit may include whether the merging organizations are not-for-profit or for-profit.

“Nine times out of 10, nonprofits merge with other nonprofits,” Schramski says, adding that if a center has a not-for-profit board, the idea of merging with another not-for-profit board is easier to fathom than their assets being bought by a for-profit.

“That being said, we are currently seeing more nonprofit assets being bought by for-profits, including private equity firms, than ever before in that marketplace,” he adds.

4 When do you notify employees?

One issue sellers will have to decide about is when to talk to employees about a potential sale. A seller may not want to get their employees upset, so hold off until the last moment. There are a variety of philosophies around how much to entrust to employees, and the reaction to a purchase is not always predictable.

“When they get to the point of notifying their employees, some sellers dread it,” Schramski says, “and then sometimes they get reactions from employees they were not anticipating.”

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