In this article, we will discuss the process of growing your behavioral health practice through acquisition. We will focus primarily on expanding an existing practice that you have already established, although some of the discussion will be relevant if you are looking to launch your first practice via acquisition or buy out a partner.
Introduction
Growing a behavioral health practice through acquisition has many of the same considerations as other business transactions. Planning and due diligence are essential, along with specialized expertise pertaining to the value of the services, contracts, client base, existing staff, and other elements of the practice you are considering acquiring. If you are already operating a practice, especially as an owner–practitioner, you may be uniquely situated to avoid pitfalls and succeed in this endeavor.
Careful planning and consideration are important. You may want to immerse yourself in literature, podcasts, and other media on medical practice acquisitions, especially within behavioral health (here is one example). Start taking notes and jot down “wonderings” as you go. These can be revisited and researched later and will help prepare you for success in your acquisition journey. As you delve deeper, you may begin applying what you have learned by looking at actual behavioral health practices that are listed for sale or that might be amenable to an offer.
Due diligence, evaluation of risks, and accurate forecasting are critical. If you own a practice already, you may know what to look for, but as your acquisition nears, it is still advisable to employ a team of experts that includes an attorney, accountant, and other specialists. There may be surprises, both welcome and unwelcome, that will be uncovered. Even if you are acquiring a practice from a friend or colleague, it is ill-advised to skimp on due diligence. You will also need to evaluate potential risks to the current and future profitability of the business, such as lease agreements, and you want to accurately forecast future earnings and expenses.
Understanding the Acquisition Process
One of the first key steps in the acquisition process is to think about your rationale and goals in expanding your practice. Do you want to bring new mental health services to an underserved community? Expand your earnings and build a bigger team? Position your expanded practice to be acquired by private equity? Could your goals be accomplished without the acquisition? Are you prepared for the risks and long hours that may be required?
Growing Your Practice Through Acquisition: The How
Once you have answered the “why?” question, the “how?” question emerges. How will you be financing the purchase, paying new bills and costs, and making payroll? Is this realistic?
As you move on to acquiring a specific practice, you need to ask questions such as:
- Are you acquiring new office locations nearby, or at a significant distance from your existing practice?
- How will you manage and staff them?
- What behavioral health services will be offered?
- What is the outlook for this area?
- Is the new practice paneled, and will these contracts with insurance companies survive acquisition?
- What does the rent or lease agreement look like?
- Will you be retaining practitioners and staff at the acquired firm?
- Will you have to cut their pay?
- Is the former owner exiting, or will they continue as an employee or consultant? For how long, and under what terms?
These are just some key questions, and there are many others. During the acquisition process, you must establish a value for the business, which will be based on these items and others. Calculating earnings before interest, taxes, depreciation, and amortization (EBITDA) is a key step. You will want to use this number along with expenses to calculate forecasted net income for the upcoming year and beyond. You will need to decide whether the business’ value is some multiple of this (e.g., 3–5 years of net income), along with other tangible and intangible factors. This should involve accountants and other experts familiar with behavioral health.
There will likely be some negotiation about the selling price and terms. You may want or need to seek outside financing, and/or a payment arrangement with the seller for a portion of the agreed price.
Responsibilities: Accuracy of Information
Both the acquiring and acquired entities have a responsibility to provide accurate and realistic information. This pertains to elements such as past earnings and liabilities on behalf of the acquired entity, as well as availability of financing for the acquiring entity. Nonetheless, you should not assume the other party has fulfilled this responsibility.
Performing a thorough due diligence investigation is costly, but critical. As the process continues, you may discover negative information that leads you to walk away from the deal. Even if you have sunk thousands of dollars on due diligence, this can still be much better than being saddled with a bad deal. Also, it may be helpful to contract with a consultant that subscribes to databases on private mergers and acquisitions (M&A), as they can provide real numbers and details for other behavioral health practices that have sold in your geographic region.
Due Diligence Prevents the ‘Gotchas’
There are many “gotchas” to acquiring behavioral health practices. At a basic level, the seller wants to make more money by making the business look as good as possible, so it is important to closely examine the books to ensure that earnings and expenses are not being exaggerated or omitted. If you are a behavioral health practitioner and an experienced businessperson, you may have an easier time recognizing gotchas, but it is still advisable to bring in outside help. You must identify what value you will bring to the practice to grow and improve it, including synergies with your existing practice. Start with the basic questions, such as:
- Does the new practice own, rent, or lease its office space(s) and equipment?
- Do they employ practitioners or work with independent contractors?
- How will your existing client base and staff be integrated with the new client base and staff?
- What is the new practice’s relationships with other healthcare entities?
- What EHR/billing software will you use?
At all times, it is important to know exactly what you are buying (and what you are not buying).
Conclusion
Growing your behavioral health practice through acquisition can be professionally and financially rewarding. With the right experience and mindset, it’s a great way to grow your practice quickly. At the same time, it is a risky proposition. At all times, you should give yourself extra financial breathing room and expect the process to take longer and be more costly than anticipated. If you are right, you will be prepared, and if you are wrong, you will be pleasantly surprised.
