Consolidation is necessary in the addiction treatment space | Behavioral Healthcare Executive Skip to content Skip to navigation

Consolidation is necessary in the addiction treatment space

Perspectives
June 27, 2018
by Jacob Lynch
| Reprints

It’s an interesting time in the addiction treatment business, with a lot of opportunity, challenges and inefficiencies, yet also with a potentially bright future. Overall, the business model is a profitable one, which is why so much money is begging to be thrown at it by investors.

My expertise lies on the business side of things, and I see it is an industry ripe for merger and acquisition activity, investments and partnerships. Addiction treatment is fairly young, fragmented and undersupplied. A few large competitors hold enterprise values over $10 billion—namely, Acadia and Universal Health Services—followed by roughly a dozen midsized players around $1 billion that are mostly sponsor-backed and in high growth mode trying to acquire the right complements. These are followed by hundreds and thousands of “mom and pop” shops competing to either solely serve a noble cause, earn a living, or be bought to earn a payday.  

M&A activity is a good thing that develops a competitive market in any space, allowing the consumer to get a better experience, theoretically. Consolidation is necessary as any industry grows and matures. A treatment center that has been in business for awhile might have a rough go of it long term and either be swallowed up or go out of business.

All it will take to drive the smaller organizations to bankruptcy is a couple payments not coming in, a few bad news stories or an unavoidable tragedy. They will not be able to continue doing business if they don’t have enough reserve capital or backing to weather a storm. It’s unfortunate. That is why these smaller businesses need to consider the diligence and risk required to acquire other competitors that offer operational complements and synergies to build on what their own operation offers.

The requirements to get to that next level in growth are substantial and usually require more capital and more efficiency to grow to a point that they either start acquiring other small operations, which they should not be afraid of, or are attractive enough to be bought by a large player. With a buyout, the owner can continue to deliver on the mission as an employee as opposed to owner. This can be done several ways.

Smaller players can:

  • Look to other comparable or complementing businesses to merge with;
  • Seek funding to be able to buy competition or launch a new service line;
  • Focus in on a niche and be the best in the area;
  • Try to capture more market share; or
  • Start to organically grow and focus all attention on that so as to be a valuable target for acquisition.

There is a gigantic amount of dry powder waiting to be deployed in this industry from investment firms. If your business is to be considered an opportunity for investment, getting key aspects in place before they start their due diligence would help your value.

These aspects include:

  • A stated vision and mission as to why you offer what you offer and how you do it;
  • Your turnkey operations that anyone could come in and perform efficiently from day one;
  • The reasons that the expenditures and overhead are necessary;
  • What your company culture is like;
  • The in- and out-of-network argument and a verified reason why your stance is what it is; and
  • A clear chart audit and quality of earnings audit that shows operations are accurate, detailed and ethical.

I’ve seen valuations all over the place, from two times adjusted EBITDA to 12 times, depending on a number of different variables. Factors might include geography, levels of care, in-network status, client acquisition cost and efficiency in operations and billing. There’s also a difference among strategic buyers vs. financial buyers. I currently see most valuations between a four and eight multiple of adjusted EBITDA—a far cry from the current multiple for Acadia of 17 times.

I’m often asked when the right time is to sell. I don’t have a definite answer. The obvious best outcome is setting up a well detailed succession plan where everything goes according to plan, and you retire on your own terms. Valuations today are highest they’ve been, but the future is uncertain, of course. Most often it is a life event causing someone to think about selling their business, such as illness, divorce or retirement, which makes the timing question irrelevant.

Selling because of a life event can make it a tough process with a lot more emotion involved than just an investment asset. If you have the luxury of planning, do some research and think through the process and what possible outcomes could occur. At the same time, don’t miss your chance to capitalize on an opportunity.

What buyers want

It varies greatly what buyers look for in an acquisition target.  Some information I like to know about my client’s businesses in order to take them to market includes:

Pages

The Treatment Center Investment & Valuation Retreat brings together owners and senior executives from the addiction treatment and recovery community to meet with key members of the investment and financial community for an exclusive three-day educational, business, and networking event.

December 10-12, 2018 | Scottsdale, AZ

Topics