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Why private equity values your expertise

December 18, 2015
by Julie Miller, Editor in Chief
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Healthcare investment continues to be a significant trend among private equity groups, but not every deal works well for both partners. Behavioral health treatment centers in particular have seen increased attention from private equity in the past few years, leaving some long-time owners uncertain of how to identify their best opportunities.

“Private equity used to only look at deals that were $2 million-plus, but now they will look at $1 million or even $750,000. That’s a big change,” said Tom Schramski, PhD, CMAA, president/managing partner for Vertess, speaking at the Treatment Center Investment & Valuation Retreat (TCIV) this week in Scottsdale, Ariz. “The more diversified you are, the more attractive you are to private equity groups.”

Private equity can also offer what is known as “the second bite of the apple,” meaning, the treatment center owner could retain a certain amount of the business in a deal and then cash out that asset later when it’s grown to be worth even more. For example, retaining 40 percent of the business at the time of the initial deal might lead to an opportunity to sell that fraction later at a higher dollar value after the business has grown more. And it’s an advantage for the investor as well.

“Buyers like that because you can help mitigate the risk that way,” Schramski said. “You are the talent that runs the operation.”

Also speaking at TCIV, Lewis Gold, MD, co-CEO and chairman of Advanced Recovery Systems, said proven, experienced management teams are seen as a valuable factor in any deal. Typically, an investor will opt for a great operating partner with a smaller asset over a weak operating partner with an asset that has higher potential.

“If you have the right operating partner, it can be the best friend the investor has ever had,” Gold said.

Good deals

For the next several years, owners will likely see a number of interested parties looking to purchase or invest in their operations. Gold—who has years of experience starting healthcare organizations and increasing their valuations—said that treatment center owners shouldn’t necessarily default to the highest bid or negotiate for the absolute highest price. He himself has walked away from deals that weren’t a good fit.

“If you try to suck every nickel out of them, unless you overperform, they will get back at you,” Gold said.

He cautioned that many private equity groups will look for a three-to-five year turnaround, regardless of what they might say at the outset. It’s better to strike a more conservative deal that costs a bit in the short term but pays off in the long term, Gold said.

Join Us

Join us again December 5-7, 2016, in Scottsdale for the 2016 Treatment Center Investment & Valuation Retreat.