Want to Sell Your Drug Addiction Treatment Center? What Are Investors Looking For?

Here are some of the things to think about when preparing your business for sale, and some of the questions you might want to think about and be prepared to answer.

Why are you selling? Make sure you have a clear, consistent and coherent answer. Are you just looking to unload and make a fast buck or is this something that is well thought out, perhaps part of your original exit plan? I can’t tell you what every investor is looking for, but in my experience, being authentic and telling them the real reason you want to sell should serve you best. Maybe you just need some additional funding to acquire the next location or add several employees. Investors look to make deals and might be interested in partnering with you to help make this happen.

What are you selling? Many treatment centers also have real estate assets, which can be a positive or a negative. Don’t rule out the possibility of selling the business but keeping the real estate and leasing it back to the new owners. In the long run, you may be better off holding the asset, seeing a guaranteed income stream, and selling the real estate down the road, in a stronger market. Furthermore, investors may be willing to pay more for your business, if that’s what they are really interested in, then if they have to put their capital into real estate that they prefer not to own. Negotiations tend to go best when you can create a win, win scenario.

Are your financials in order? The better you are managing your cash flow the faster the process will go and there will be fewer surprises in the final negotiations. In the addiction treatment center business it is difficult to manage incoming and outgoing cash especially when dealing with Insurance companies and clients who are scrambling for cash from multiple different sources at the last minute. Run a tight ship and you will be rewarded.

What is your adjusted EBITDA? EBITDA = Earnings Before Interest Taxes Depreciation and Amortization, an indicator of a company’s profitability that is used by investors to determine what your business is worth. Do you run your car or other personal expenses through the business? Do not fret. These actually qualify as “add backs” when calculating an “adjusted” EBITDA number. The new owner will not have these expenses so they can add them back to stated profits to determine the value of your business. The same applies to any owner compensation in excess of market rate for work performed, which automatically qualifies as an add-back. Careful: if an owner is not compensated on the books for work performed, this needs to be considered as well (in this case, a subtraction). In general, be prepared to make the case that your adjusted EBITDA, the amount of EBITDA a new owner would actually see, is higher then your actual EBITDA.

Do you know what your business is worth? Be realistic about its value. The days of getting 8X EBITDA are few and far between. In the current market, 5X is more likely, unless there is a compelling growth story. And we all know what has happened to the real estate market. As with any business, investors are looking for a return on their investment. The days of loose credit are over, so investors, who are putting up a higher percentage of equity, can’t afford to overpay and still see a return on their investment.

How is your clientele “trending?” Are average rates trending upwards or are you having to discount your services in order to get the clients to close? What is the average stay in your treatment center? Is it increasing or decreasing? Are you typically a 30-day program but people want to stay the extra month? Be prepared to highlight positive trends, and explain any changes that have occurred that might be of concern. Buyers are wary of centers with decreasing occupancies, reduced stay periods, or other signs of softness. Particularly when owner motivations are not clear, deteriorating business trends create the impression that the owner is looking to get out because his business is going downhill. If trends are poor, consider waiting to sell until you have some positive trends to point to.

How will the business be managed on a day-to-day basis under new ownership? Having a behavioral health or drug treatment center run itself without the owner is definitely attractive. So if you aren’t used to delegating, it might be time to start thinking about it. Acquisition deals come in many different formats and it is not uncommon for the owner(s) to stick around after the sale for a few months or even a couple of years. Depending upon your objectives, this could be a positive (extra income) or a negative (if you’re ready to move on). Willingness to help out with a transition is always viewed as a positive by buyers, but so is having a business that doesn’t depend 100% on you personally.

Should you work with a business broker or investment banker? If you are in a hurry to get a deal done, this could make sense, but it pays to use your network, ask around, and talk to buyers who may approach you directly before listing your business “for sale”. You may be able to negotiate a finder’s fee rather then an outright commission, which could be significant savings, or avoid a fee altogether if you are approached by a buyer directly. Furthermore, a discreet sale may be preferable to a public process, which can be disruptive and concerning to employees and patients. Another disadvantage of formally listing your business for sale is that if it doesn’t sell quickly, at some point the listing becomes stale and buyers tend to assume there must be something wrong with the business.

What are buyers looking for right now? Criteria may include location, size, profitability, and type of program offered. I know a significant buyer with a strong interest in outpatient treatment, methadone clinics for example. In the residential area, larger facilities open up a different class of professional buyer/investor compared to smaller ones, which are more likely to be purchased by an individual or small group of investors.

Last but not least, before you sink a lot of time into this process, make sure you qualify any prospective buyer who approaches you. Evaluating a fit is a two-way street. Make sure the buyer is qualified financially to make the purchase. I have seen deals fall apart when the pursuing party does not actually have the funding in place, and needs to raise capital or find investors in order to complete the purchase. Are you looking for cash or willing to take a note? Don’t rule out a seller note, if you can afford to take it. In some cases it could be beneficial to all parties.

In summary, there are quite a few things to think about when selling your treatment center. Fortunately, if you are dealing with a qualified buyer, a sincere attempt to work through these questions will be met with patience and appreciation. Call me if you would like to have a confidential conversation.

Jim Peake is a management and internet marketing consultant with special focus on the behavioral health and the addiction treatment industry. He helps treatment centers improve their web presence and in lead generation online as well as offline. He uses advanced SEO and PPC direct response advertising for addiction treatment search engine marketing. He also helps sellers meet buyers of treatment centers.

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