Acquisitions Anonymous - #1 for business buying, selling and operating - Would You Buy a Rehab Center Earning $100K Per Patient?

Episode Date: November 8, 2024

In this episode of Acquisitions Anonymous, Bill, Mills, Michael, Heather, and special guest Connor Groce dive into the deal of a $2.1 million EBITDA drug and alcohol addiction center in the Mountain West. With a 40% profit margin and revenue reaching $100,000 per patient, this addiction center’s comprehensive care model offers unique insights for prospective buyers.Our hosts break down the intricate aspects of this business, from the operational costs of running multiple sober houses to the regulatory challenges associated with the addiction treatment industry. With specialized programs like equine and sports therapy, as well as strategic contracts expanding its patient base, this episode explores what makes this center both a compassionate service and a high-revenue investment.Thanks to this week's sponsor:Acquisition Lab: Looking to buy a business but don’t know where to start? Acquisition Lab, founded by Walker Deibel, author of Buy Then Build, offers a cohort-based, comprehensive education and support community to help you navigate the complexities of acquiring a business. Learn more at https://acquisitionlab.com/ or contact Chelsea Wood at [e-mail] for a consultation.And our additional sponsor:Viso Business Capital: Looking for funding to fuel your acquisition? Viso Business Capital partners with 30+ lenders to secure the best financing options, fast and without friction. Sign up for a free Q&A session about SBA loans at https://visocap.net/.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

To really have a quality business like this, they look at their success rate. How many people don't relapse after staying in the program? This is on the harder end of the spectrum where the information asymmetry works against you in just multiple, multiple ways. So this doesn't have to be like a huge, huge facility, right? You can be running a relatively small-scale operation. And when your revenue per heads, 100 grand, that can be a very, very good business. This is an Acquisition Anonymous?

Hello, another episode of Acquisitions Anonymous. We don't have 100% here. Hello, everybody, and welcome back to another episode of Acquisitions Anonymous. I am one of your host, Bill Dallessandro, and this is the internet's number one podcast on buying, selling, and operating small businesses. This episode, we have a really cool business. It is a drug and alcohol addiction center in the Mountain West. This business is super profitable.

It has a 40% EBITDA. margin and they say their revenue per head is about $100,000 per patient. Also, the other special thing about this episode is you have five hosts. Yes, count them five hosts today. It is me, Mills, Michael, and Heather, who you already know. And we have also brought in Connor Gross, who is a franchise consultant, who has acquired a couple franchises himself and helps other people buy franchises. He brings a cool perspective to the deals. If you are into franchising, we've also done a couple franchising deals with Connor. So check our website at ACQU, Anon. for those if franchising is something that interests you. And without further ado, I hope you

really enjoy this episode of Acquisitions Anonymous. This episode of Acquisitions Anonymous is sponsored by Acquisition Lab and their team. They've been longtime supporters of the pod and they provide a really great service for people who are looking to acquire a business. So it's created by Walker Dival, who's become a friend, the author of Buy, Then Build, How to Outsmart the Startup Game. So Acquisition Lab is an accelerator with a highly vetted, co-hearted. based educational and support community for people who are serious about buying a business. So a lot of our listeners like you, you turn in every week to our deal reviews, you want to get in on buying a business. You know, you're on this podcast because you're trying to learn

how to buy a business. But if you're not quite sure where to start, acquisition lab is a great place to start. So they exist to help people buy a business and to navigate all those complexities of the process, everything you hear us talk about on the show. They provide a proven framework, tools and resources that support you all the way from search to close. They do it. There's a whole bunch of educational material and support. So if you're serious about buying a business, check out AcquisitionLab.com, or you can actually email the program director Chelsea Wood directly.

Her email is Chelsea at buy then build.com. Hello, everyone, and welcome to another episode of Acquisitions Anonymous. You have the full crew today. There are five hosts going down the list. We have Heather Anderson. We have Michael Girdley. We have Mills Snell. We have myself, Bill D'Alessandro, and special guest today.

Connor Gross, who is a professional at franchising and franchise consultant. So he's joining us for a couple shows. So thanks for being here, Connor. Absolutely. Thanks. All right. I think this is the first ever acquisitions on us with five hosts. We have to, like, raise our hands or something before we ended up speaking.

But we have a good deal today. So you guys are ready to get into it? All right. I'm going to read this one, and then I'll see what you guys think. So this is a, it's a deal from our friends at Axial. As a reminder, Axial is a marketplace of businesses for sale, and it's a little bit different than like your biz buy sales, because the deals on Axial are are vetted, and they're usually larger. And there are sometimes represented by a sell side intermediary, which usually means just the whole process is a little bit more professional. So we found this deal on Axial.

This is a $2.1 million of EBITDA Substance Abuse Treatment Center. It says this recovery clinic is a premier mental health and substance use disorder treatment facility. The center specializes in customized outpatient treatment plans combined with a sober living program, targeting long-term sobriety for individuals aged 18 and up. The clinic is recognized for its holistic, approach, including dual diagnosis programs and sports therapy, all backed by a prestigious certification such as the Joint Commission, whatever that is, the Joint Commission, very formal, and legit script.

Key highlights of the deal. High quality certs, their joint commission accredited, they have an A-plus rating from the BBB, and they are recognized by psychology today. They have strategic contracts and have recently secured access to military and veteran communities, expanding their patient potential significantly. This contract can generate more than $100,000 of revenue per patient. I'll come back to that. Wow.

They have a diverse payment model. 75% of their patients use insurance, which they say is primarily out of network, while 25% of patients are self-pay. The business does not rely on state health insurance, which leaves room for future growth in that sector. Their services and facilities include treatment programs. they offer pHP, IOP, and OP levels of care with dual diagnosis options. We're going to need to unpack that statement.

Treatment includes holistic therapies such as outdoor and equine therapy. They also have a sports therapy program, which is a unique component tailored for athletes, offering recreational activities to complement their recovery. And their facilities include a large office and multiple sober living houses within close proximity, with leases transferable to the new ownership. So here are their financials. We have 2022 and 2023 financials. In 2022, they did 3.5 million of sales and 1.1 million of EBITDA.

And in 2023, they did 5.2 million in sales and 2.1 million of EBITDA. So that means year every year they grew revenue 48%. And their EBITDA margin is an incredible 40%. The geography of this business is the U.S. Mountain region, and they do alcoholism and drug addiction and counseling programs. And it seems like in their inpatient facility. So that's what I got. Thank you to friends at Axiol. What do you guys think of this deal?

Do you guys understand this deal? What does this do? It's addiction treatment. So you've got sober houses. You've got, it sounds like outpatient therapy clinics. So I guess I kind of first would want to know, like, how many houses? how many clinics, how many clinicians, you know, just to kind of get an understanding of what the mix of general services are. But I think, you know, most of the time they make most of their money

on the inpatient care. And it's all about like how long they stay so you know how much per patient you are getting. But to really have a quality, you know, business like this, they look at their success rate. You know, how many people don't relapse after staying in their. program. And I think that's a really key thing to know. Also in terms of there's a stigma around this industry. I'll just say it. You know, there a lot of lenders don't like it at all. Even, you know, if the deal, the particular deal happens to be good because the stigma is that there's a lot of fraud. There's a lot of kind of revolving door with doctors that allow, you know, the same person to go back in and out and they're not really trying to cure them or really help them. They're just

making money off of them. That's the stigma. I'm not saying that that has anything to do with this one, but you have to kind of know that going in and really look at the quality of care that's going on where they're getting their patients, you know, kind of test it for whether it fits sort of in that category or not. And that usually comes down to how many, you know, what is their rate of success of people that don't end up relapsing. Do you guys know what Ph.P, IOP, I hope levels of care are? So, Ph.P stands for partial hospitalization program. IOP stands for intensive outpatient. And so, okay, so there's multiple, it says there's multiple levels of care in the continuum of addiction treatment.

Level 0.5 is prevention and early intervention. Level one is outpatient program, so that would be OPE. Level three is a residential or an inpatient program. I believe that's IOP. And then there is an intensive inpatient program, which I guess is an IIP. So this is varying levels of care, some of which involves hospitalization and some doesn't. And I assume the hospitalization because some of these drugs, when you go through withdrawal, like you run the risk of death.

So, yeah, it's rough. They also say they offer dual diagnosis options, which means that, you know, very often you're not just being diagnosed with substance abuse disorder or addiction. You're also being diagnosed with depression or, you know, some other underlying condition that is driving the addiction. I imagine this is good for two reasons. One, because it allows them to actually attack the root of the person's problem. But it's probably also good for insurance billing, if I had to guess. You can probably bill them under different codes and maybe the billing for certain diagnoses. is higher than for addiction.

So they're able to both actually help the people, but they're also able to get compensated for it if they're addressing the root cause of the problem. So far, Heather wins the award for knows most about this space. So don't everybody speak up at once. Heather, what is it with you in the drugs? I'll talk about the equine therapy part too. I'll talk about the equine therapy part because they had me at that.

I was like, oh, okay, equine therapy. I want to buy it now. I do, I'm a horse person, and I have seen programs in my neighborhood where they brought, you know, folks out from one of these kinds of programs and just being around horses. And, you know, I think it is good. I think that's, but a lot of the programs will have something like that. It's not that hard to add. It's not like they have to have a stable of horses of their own to do it.

I think the sports part of it is pretty interesting because you want to look, all of these kind of have to have a niche of some kind. I've seen them in my state of California, like the Malibu area where it'll be like high-end, real estate and come to our sanctuary and they're really attracting folks with a lot of money. There's no insurance there. They're just paying a lot of money, wealthy people, you know, sending family members or whatever. They've all got to have some kind of niche. So this one sounds like, you know, you're in the Colorado mountain region and they're using some kind of sports to as part of the program, which I think is great. I think that's a pretty smart one. And it's going to attract a certain type of patient to whom that is appealing.

So I think that's great. You're showing us the video. Cool. I've pulled up the website for. It's holistic luxury rehab is what that says. Oh, luxury rehab. Malibu. Yeah.

The first type that you mentioned, this is called Passages Malibu, which when I clicked had outbid everybody else on Google AdWords. So this is probably one of those categories in Google AdWords. It's like $100 a click. Yeah. Right. Yeah.

So they, man, I mean, if you're not watching this on video, you're missing out. They have a guy doing. curls and a guy like having a breakthrough on the beach. Acupuncture. Acupuncture. Yeah. He even comes back home to his family. There's an embrace on the front porch and it's a what looks like a $10,

$9 home. So like this sign me up. Right. These are the, these are the high end almost kind of celebrity family member type rehab centers that you'll find. They're not all in California, of course, but there's quite a quite a, Quite a few in the Malibu area along the coastline there.

That's their niche. So, you know, each rehab program, you kind of have to look at what the niche is and who's paying. And once again, we've got, you know, insurance paying 75% out of network insurance, which means, you know, they've got some coverage, but they're probably paying a lot of it out of their pocket. So you are probably talking about a little bit more high-end patient clientele. They're paying a lot out of pocket and or they're paying it fully out of pocket, 25%. You know, as the ones I've seen, the really high end in Malibu, the best ones, they don't, as far as a business is concerned, they don't take insurance at all. They're all private pay fully out of pocket.

And they prepay a huge chunk of that, you know, when someone comes into treatment. So that's the other thing to kind of understand is when do you get paid on these? Depends on whether it's private pay or insurance, of course. and it kind of helps you understand what the cash conversion cycle is. How long are you waiting to get paid? How much an expense are you laying out before then? These are also usually pretty heavy on payroll. These are the kinds of businesses where your biggest expense is payroll and real estate.

You've got a lot of people to manage this and high-end salaries, higher-end salaries. And then you've got a lot of facilities. You've got clinics. You've got sober houses. Sometimes the business owns the sober houses and sometimes they rent them. This one, it seemed to say that they are rented or you would be renting them, whether the seller owns them and just is not selling them. So there's a lot of operating costs to these businesses. So I think kind of figuring out the working capital is pretty important.

Hi, Heather here. When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions. because when you're buying a business, the best financing isn't one size fits all. There's the best rate, fastest to close, the specific loan structure that you need, or a little of all of those things. That's why my company, Vizzo Business Capital, works with over 30 different lenders to find you the best funding in less time and with less friction so you can focus on the deal. Sign up for a free live Q&A session on SBA loans at Vizoccap.net.

Then click Zoom sign up in the top right corner. That's v-I-S-O-C-A-P dot net and click Zoom sign up. Looking at this, I'm actually really surprised that it's 75% insurance paid because this strikes me as the kind of place that, you know, Heather kind of fits what you referenced and that you have certain high-end providers that are exclusively working. I don't know if it's just that I don't have enough exposure to these, but I'm surprised that's something that is this upscale is still falls within the insurance category because that does change the way that I view this. Yeah. And that's out of network. So probably not a lot of it is being paid, you know, in those cases by the insurance.

There's probably sort of a dollar limit. And then the patient is paying the rest. So you kind of have to find that out to know, you know, how much is really coming out of the patient's pocket and what type of clientele are they really serving. But my guess is it's pretty high end. And Heather, earlier you referenced a certain type of this care that was the most profitable. Can you remind me what that is? Well, I'm not 100% sure. But I think it's the longer you keep, you know.

It's all about how much you get per patient is all about how long they stay in the program. So if you've got kind of some patients that need to stay in longer term, you know, that's where that 100,000 per patient up to, I think what you'd find is to get 100,000 out of one patient care situation, it's a long treatment cycle. Like that might be a six-month treatment cycle. And so what you look at is how long is the average patient staying in the program? And this one seems to be designed for the long-harm. because it's got all those different levels of care.

You can come in intensive and in hospital and, you know, graduate out to the lower levels of care over the long term. And that probably results in better outcomes, I would guess, as well. So it's all about how long the patients are staying in the program and what levels of care. So Mills, you and I did one a couple months ago that was for kids, right, out somewhere in the middle of nowhere, Utah? Yes. This one's for adults.

The thing I think about with this type of business and this industry is, you know, who are the, who are like the power buyers and why haven't they, you know, why haven't they picked this up? There's been so much consolidation in the last 10 years in this arena. And it may be that it's just kind of mature and long in the tooth and this person has, you know, waited a while. But my guess is, is that, you know, if this doesn't just create an incredibly competitive bid. process, then there's a reason that everybody has already passed on it. And, you know, all the characteristics that we're talking about, you know, payee dynamics, level of kind of semi-skilled all the way up to skilled, you know, care. All of those things go into like a very rigorous analysis, analysis for these repeat buyers. And I just think, you know, if you're, if you're a person who's

never bought a business before and you're thinking, do I want to buy a home service business? Do I want to buy a small manufacturing business. Do I want to buy something e-commerce? Do I want to do a franchise? Do I want to do this? This is on the harder end of the spectrum where the information asymmetry works against you in just multiple, multiple ways. So it scares me because I really don't know that much about it, except that there's a lot of money, you know, in this segment of the market. I mean, we haven't even talked about like the next step in the cycle after this is methadone clinics, which there's been a lot of.

lot of consolidation and acquisitions in that arena because you basically have people who were reliant on this in perpetuity, right? They have to go and they can't self-administered. They have to go daily or, you know, multiple times a week to be administered methadone because it's controlled. So it's just, it's an interesting world that I just really admittedly don't know that much about. A good question, like, given the money in this space, why has it been rolled up, right? private equity typically does not have a lot of morals about stuff. Like, they're not going to be scared of the value here. Which is kind of one of the interesting things about the fundamentals of asset management,

venture capital, like AUM type stuff is like all the money comes from these big, like endowments, like Harvard University. And they go give the money to some VC or some private equity person who then occupies and does all the dirty work for them and is comfortable putting money and making money from addiction, right? But anyway, sorry for going off on a tangent. With five hosts, I promised myself I wasn't going to do tangenting today. But what I'm not seeing Mills is that nobody's rolled up this space. Like, I'm not seeing a big chain, right? There are. There's a bunch. There's a bunch. So like, just Googling around a little bit, and this is a little bit dated, but like some of the big

names, I think on platforms was like Baymark, Medmark, Bart programs. And then they did a bunch of you know, add-on acquisitions. So just Googling around it a little bit, I don't, I mean, I don't know them, but I don't think it's as in your face, you know, like we just recently did roof repairs on a methadone clinic and the guys came away and they're like, it was the most bizarre thing. Like, people just really seemed like zombies at, you know, eight o'clock in the morning. But there's no like big banner. It's not like, you know, plasma, right? Or, you know, things that are a little bit maybe similar, but there's not as much of a stigma to. So I don't know that you get the same kind of

headline notoriety with this. Yeah, they have been rolled up by private equity from what I've seen. And that's typically who the buyer of something like this is. I occasionally see them out, you know, out of that network and sort of an SBA kind of searcher. But it's really, it's hard to buy something like this unless you have experience, at least in health care, at least in managing. health care businesses. It's tricky for just the average buyer to come along and think that they could do this. But yeah, absolutely, private equity has been rolling them up. So I wonder, you know, if that's where this one ultimately ends up. Or you have a seller who doesn't want to be part of one of those systems maybe, you know, who kind of bucks that trend and wants to sell and

keep it independent. And they're looking for a very particular type of buyer, perhaps. I was just going to say Another thing that could be the case is just given that they grew at 48.6% year every year between 22 and 23. I mean, two things could be happening. They could just be wanting to sell into that level of strength. But the other thing I wonder about something like this is given that you do have the facility constraints is, are they just maxed out, you know, beyond where they're going to be able to grow revenue anymore? And clearly, the margins improved a lot between, you know, 2022 and 2023, too. So clearly there's some type of inflection there where, I don't know, they could. be trying to sell at the top.

I think what Mills and I saw also with the one in Utah was it was so far out of the middle of nowhere. Remember that one? Mills? It was like it was there was like an element of it. It's like you're going to a ranch. You know, like there's a the detached nature of it was I think a feature not a bug. Yeah.

And the equine nature of this while hugely appealing to Heather has me worried that if I look at most of these that are out there like there's five or six here in San Antonio, they're, you know, where I am. And then the one in L.A. is in Malibu, which is right next to L.A., like, I wonder how much of a disadvantage it is owning one of these when you're out of the country, especially if, like, I mean, you think about your family. Like, does your family want to be driving out seven hours to the middle of nowhere, Utah, to, like, track you down and visit you on the weekends?

Probably not. And especially if you're doing insurance and targeting a lot of poorer people, they're not signing up for a flight and that kind of stuff. to go far away. I don't know. I don't know that you're specifically targeting poor people just because it's insurance. Yeah. I don't necessarily think that.

And I also think there's a lot of people who want to live in the middle of nowhere, Utah. You know, like, and like this could be very romantic for the right family and right person. You know, maybe Michael, you know, that's not for you. But I think, we can't all live in San Antonio. Okay. We wouldn't have any diversity in the podcast. Bill, if living in the middle of nowhere with no people in southern Utah so romantic, how come nobody lives there?

It's a niche. It's a niche. It's a niche like any other niche. I think sometimes with addiction treatment, there is a thought that removing them from where they're living, where they've been abusing, is a good first step. You know, go somewhere else, be somewhere else, and start the new habits there. Yeah, I actually think this could be quite a good business. I mean, you saw they've just landed new contracts where they say that revenue per patient is 100 grand in the military and veteran communities. So, like, they have 5.2 million in sales here.

That's potentially 50 people, basically, you know, to care for. So this doesn't have to be like a huge, huge facility, right? You can be running a relatively small scale operation. And when your revenue per heads, 100 grand, that can be a very, very good business, especially because this is, I mean, I guess, there is the partial hospitalization, the intensive outpatient, and the outpatient. But assuming your balance there is right, your costs don't have to be very high. It's almost shocking, you know, that their costs are managed so well, given that this is not, you know, this isn't direct to consumer e-commerce. This isn't SaaS margins, right?

It's not software. This is a skilled business. There's actual employees and they're actually providing a service on premise. It looks like in almost all these cases that says something I don't know, being in the path of maybe declining margins as there's more competition or as, you know, there's maybe regulatory pressure or that would worry me long term about the sustainability of the margins. I think it's the demand side that really drives these businesses. Unfortunately, that's the sad news. Yeah, it's the growth in addiction in this country and people willing to pay more for quality services to potentially overcome. That's what makes this business so good from a margin perspective, is that you're basically, you're not just selling like two weeks of hotel room in beautiful Colorado.

You're selling an outcome, which is that at the end, you won't be addicted, right? And so you can charge a lot more for that, and insurance is going to help pay. And that lets you sell functionally the same thing for just a much higher price. And the other thing I think about just on the, you know, the regulatory and political side of this is like given the political climate and you combine that with the demand side, I don't think that, you know, while obviously the government touches this and that is going to be a factor, I just don't see it being a politically viable, you know, move to make any moves that are going to be a net negative to, you know, having more substance abuse options in the future.

Just unfortunately given the demand side of things. So I think we've got enough interest. I'm getting the book. Mills, how about you? Thumbs up or thumbs down? No. Out. Connor, thumbs up or thumbs down?

I think it's interesting. I just don't know enough about it. I'm not the right buyer. All right. Heather? Yes or no? Yes, I wouldn't be the operator, but I like the business. Yes.

All right. Gerdley, if this was in San Antonio, thumbs up or thumbs down? Yeah, yeah. No, objectively, like, I think it's a great business to be in. And we haven't really talked about it. Like, if you do this with a highly principled, like, approach to it, like, you're going to help people. And I think that's great. So I'm a thumbs up from that reason.

I don't know if I'm the right buyer. I'm probably in the Connor bucket. But I think, you know, if you're, if this is a program that's doing things the right way, like, I'm a thumbs up. All right. Enough interest that we like this. If you were in this space, if you were in the drug and addiction therapy space, we would love to hear from you on Twitter. Tweet us at ACQU and on Twitter or X, whatever it's being called these days. Or go to our website, acqueunun.com. If you're interested in more health care deals like this, we have all of our almost 400 backlog of episodes tagged by industry. So you can kind of listen to a customized acquisitions anonymous feed.

of just the deals that you're into. So check us out on our website, and you can also get it on a newsletter, where we will email you when we do new deals that you are interested in, so you don't miss any episodes. So that's going to do it for this episode of Acquisition Anonymous. Thanks to Connor Gross for joining us,

and we will see you guys next time.