Considerations in Starting, Buying, or Selling a Behavioral Health Company

Considerations in Starting a Behavioral Health Company

• General Business Practices
• Start with why. What is your purpose? What is your Vision? Your mission statement? Stay true to those and provide quality comparable to competition. How are you different? Do you have a niche? Do you have an advantage?  
• Develop a business plan. The key should be the part above. Now add in how you’ll accomplish that ‘why.’ Will you buy or lease the space you provide the service in? Why your location? Plans to service what community? How? What will be different or better? Who will be involved? What will you be known for? What is the growth plan for 6 months, 1 year, 3 years, 5 years, 10 years? This will need to incorporate different aspects of all business, such as HR, Marketing, Accounting, Legal, Administration, Operations, Clinical, Etc. as well as things specific to this industry, such as medical records, billing, utilization review, etc. You need a very clear, easily explained and understood plan to have these areas function properly and efficiently, and plans for their future, as well as their costs.
• Funding / Capital - Add in the numbers to the plan – what will it cost to open, and what will it cost monthly to operate? Huge suggestion – overestimate this by more than 50%. It always costs more in this space than you expect, a lot more. Reimbursement and collecting payment for services is slow. There are many unexpected costs out of your control. And if beginning, start with one smaller operation and niche/focus and be extremely overfunded and then grow your offerings/services as you build a name as the very best at what you offer and having high quality care. How will you acquire the needed capital? Is it out of your own pocket hopefully? If so, great, way easier to stay true to mission and not be beholden to creditors, investors, stakeholders. If capital will not be yours, is it going to be borrowed or lent from creditors, or is it going to be raised from investors that will own a portion of the equity interest in the business? What kind of terms can they expect? What returns do you forecast for them? What will the costs be for various attributes of the business – i.e. technology, staffing and human capital, fixed costs like hardware in the physical location, administrative costs, legal and compliance, accounting, marketing, office supplies, costs to deliver service, etc. You will have fixed costs that remain the same monthly, variable costs that change based on your size and customers and offerings, and one-time costs that you have to pay for initially or very rarely. Show investors, or even yourself if you are using your own capital, a clear path to profitability over time and sustainability of the business, as well as steady growth. Know your numbers. So many executives in this space do not know their numbers. It’s remarkable. Owning a business, even though you may be a clinician or social worker or any number of professions that may dislike accounting and such, means that you absolutely still must know your numbers. Your costs, your break even amounts, your cost and revenue per patient, etc. Know them all. Get used to it. The focus is still on quality of the service you provide, and numbers will come with time and are not the end all be all, however they are important for an owner to know and make wise decisions.   
• Outsource – So much great technology these days. Services and apps and software and such will help you do most of the legal setting up of your business, the business plan, the accounting, the marketing and organization, and so much more. There are so many other businesses that offer to take the billing or medical records, or utilization review, or marketing, or any number of tasks off your plate. Have a good relationship going in before you even undertake the project. If so, you know who to use. Just make sure that they provide value, and you trust them. This is the least expensive way to build the business and have necessary tasks done. There are risks, however you cannot perform all roles and have all responsibilities. Find technology and services and third parties that all work together and communicate well with each other so that you are less stressed and more focused on purpose than on day to day operations and details.  
• Staff / Human Capital – Hire the best earlier than you think you should or can. Learn to delegate and lead by example and empowerment. Do not worry about titles and promotions too early. You don’t want to have to change titles all the time, or demote, or all of that nonsense. Hire people that are humble and not concerned about that stuff so much so that you can offer them incentives to do their best, instead of title, power, and salary money. Build an onboarding process over time. It is 6 times more expensive to hire than to retain and teach a current employee.
• Sources of Patients / Income – Where will patients come from? Question number one! How will you get the first patient in the door? What advantages do you have? Will you find them? Will they find you? What is your niche? I know it’s hard in this industry but try your best to have a ‘waiting list’ of patients when you open your doors. This function is of supreme importance early in the business lifecycle, and becomes less important as you grow and build a reputation for quality service.  

Get Accredited Early – It’s a nonstarter these days. You must be accredited. Talk to them early and ask what the requirements are, begin to address those tasks and criteria. Ask a consultant specializing in it or a mentor or resource you may have to help navigate the process in the best and most efficient way. You don’t want to deal with bad news, with lack of reimbursement, etc. because of not having a very attainable piece of paper and accreditation. Just go through the process, no matter how tedious, and the small amount of upkeep to stay accredited. Its’ worth it. 

Go In Network Early – Do you have a contact at an insurance company? Make them your best friend. Pick their brain. There is no point in this day and age to battle the insurance company. If a portion of your revenue, say 10% or less comes from out of network, fine. If all of it does, have a very good explanation as to why it makes sense, not just, “It pays more and I need more in order to pay my bills and profit more.” That reason and explanation has been the case when people have raised funds from investors and been underfunded starting out, in the past. If your payment source is government pay that is also fine, it usually requires scale so a lot of your focus is on size and quantity, which is a very profitable strategy in some states and areas. Regardless of this, if you are going to accept in network insurance payments for your services, start early so you can work the kinks out, build a healthy long-term relationship, and make business less stressful for yourself. Trying to do it later when business may be stressing you in other ways, the market may be changing, laws may be changing, reimbursements may be late, etc. is just much more of an unnecessary headache. Do it early to build some normalcy and stability in your business and its revenue.  

Move Different Operations In House ASAP – Advice from the masses of successful experts. Cuts down on conflict of interest, opportunity slipping through cracks, and your own peace of mind when so many things can go wrong. Obviously will require you to do some cost/benefit analysis compared to the software, apps, third party options that you use to start the business. While it will cost more, it may keep you sane long term, and you can make it produce more revenue and bottom line by incentivizing staff to take ownership and do their best, something you can’t do very efficiently with third party providers of these functions of business.  

Tips – There are other general pieces of advice true for all businesses that I imagine you already know. Don’t make excuses, the buck stops with you, find solutions, deal with adversity, build character and learn from mistakes. Know your competition very well. Know your numbers. Be very fired up and energetic about what you do and able to convey that succinctly in your conversations; after all, if you’re not psyched, why are you doing this?! – section number 1.  

Considerations in Buying a Behavioral Health Company

• Again, why are you buying?  
• Is this to enter the space or to expand?  
• If it is to enter the space, why do you want to? What do you see? That will help determine and locate the best target for you. A professional like me can help you there, but knowing why you want in and what your plan or advantage is will help greatly in sourcing the best acquisition for you.  
• If expanding, what are you looking for? What do you need? What are you most interested in or see the best opportunity in? Is the purchase to expand, to add services, add levels of care, add geography, add contracts, add a brand name, modalities, beat competition, etc.? All of these questions are very important in locating the best target. Ask for a professional like myself to help with that process.  
• What advantage do you have? What synergies lower your cost the most, make your revenue potential the highest, or offer you the most efficiencies and best streamlined operations? What complements your business the best and gives you that advantage? Will the point of your purchase, the purpose, have a great chance of success afterward with little effort, or a large risk that requires a lot of work or capital or good luck? Are you looking to integrate vertically or horizontally? The answers to these are important, as well as the reasons why, and can help you figure out exactly the best opportunities available for you.  
• Valuation and Price. Risk. Competition or Expansion or Complementary Business? All factors to consider in your purchase and spend some time on, consult with someone about. I can speak in more detail about these topics such as market prices, risks in buying, etc. Financials, census, rates, cost to acquire a patient, marketing and referral sources, uniqueness, accreditation and reputation, etc. all are important aspects to consider in a target. How will your synergies provide an advantage in these areas? Which ones are most important to your plan?  
• Buying one or many assets. This can help you decide on an offer price based on your flexibility.
• If you have a sponsor, money part is easier, if not, it may take a lot of saving and patience and planning. Possibly you know someone that is retiring or mentored you or wants you to buy them and carry things on. Possibly you now someplace that you have a leg up in the purchase process on everyone, or maybe you know about it first, or what it would take to make it happen, or the risks it currently has, or the potential it has that hasn’t been tapped yet, etc. All are important inside information that can help you and is very important and necessary to do your research and strategizing. Don’t just plunge into an industry or a large purchase thinking it will be easy and will always work out with little hard work because the industry will grow, and the needs will not end. This is not good business practice and strategy. Take it seriously.  

Considerations in Selling a Behavioral Health Company

• Again, why the thought of selling? What is the reason? Selling all or some of the business? What’s your ideal scenario? Will you continue to work? Don’t want the stresses of operations and administration of a business and just want to help patients? What is the exit strategy or succession plan that should have been developed long in advance? Are you retiring? Or selling due to a life situation? Bring on a partner for more capital to grow with? What’s your reason?
• Real estate involved or not?
• Pros and Cons List. Depending on plans, finding a cultural fit. Path to growth, depending on future plans. Time value of money, bird in the hand worth two in the bush, and work/life balance. What is the value of your time/sanity? Potential to sell twice? I can talk about all of these in much greater detail, as they determine a lot of the process and decision making. Probably most important part.  
• Start making plans earlier than you think. Work toward the plan to make it an easier and smoother and more enjoyable process. Do this in detail and work toward the goal. What number will you need? Let’s discuss the goal. Define the goal/plans and retirement. I, or most financial planners, can help with that process and visualizing the future and backing into the current number you’ll need. Retire to something not from something. Does it make sense to sell if the number is not enough to make a big difference from what you currently make, and you know you’ll need to still work? Don’t make it a random, scattered process. I can and should speak more to this topic as well…
• Make there be a point and work toward it. If it is altruistic, congratulations, I am a fan. Realize even nonprofits need to earn money in order to continue to serve the less fortunate in their mission. If you’re doing it for all the right reason, but neglecting financials, it won’t last long unfortunately.
• Selling is another full time job. Set expectations. What is risk? Prepare at least 6 months, hopefully a year to sell before you actually go to market. Contact the professional you’ve chosen to use at that time, as you begin to plan to sell, not when you’re ready to go to market. The more you prepare early, the easier the full time job will be when you are at market and fielding interest from parties. Expect a lot of work to earn a large paycheck. Expect a timeframe of a year, just to be safe, from going to market to receiving your funds. It should be less, but I’d rather you were pleasantly surprised than disappointed and fatigued. Think of the risks – you have to continue to run the business well while trying to sell it. What if people learn more about your business than you’d like? What is the opportunity risk? What is the deal fatigue risk? What about competition trying to learn more unethically? What about the market learning you’re for sale? Is there risk then? Think of all the risk, don’t be scared of them, strategize how to combat them, hire someone to help you navigate through them.  
• Process & Timeframe - Process is a long process if explained in detail, but as for a summary – 1. Start planning to go to market. Increase value with many practices and metrics that someone should help advise you. Target your best or ideal or favorite buyer and what they would like or need…can you provide that? Do all the upfront work mentioned earlier – figure out the number you need and if you can get it, etc. etc. 2. After interviewing professionals to build a market for your business, and choosing one you like and trust and knows the industry and the buyers, you will sign an agreement with them, hopefully not one that costs you anything until success, and that professional will ask you for details about the business that are updated so he or she can build a marketing piece, or a profile of the business, a CIM. This is just a summary of what the business and opportunity is. 3. That broker should then confirm everything in it with you, the seller, confirm the very high level, general, anonymous blurb they use to advertise the opportunity, and the timeline, which should have deadlines for getting NDAs back signed, accepting offers, deciding on offers, diligence periods, etc. 4. Once a plan is in place, the broker will start to reach out hopefully to those that they already know it will be a good fit for and sell them on making an enticing, aggressive offer. If not, the broker will build a market for the investment asset by anonymously enticing many interested and qualified buyers. Those buyers that are interested will be required to prove their ability to execute, their funding, their history, and to sign an NDA which will bind them to not discuss the information they receive and learn. 5. At this point, the broker will help you sort through interested parties and consult with you on your wishes and feedback, as well as opportunities and future options depending on what your plans are after the sale. The broker should begin to try to build the best and most aggressive market they can to get multiple parties for you to choose from competing to buy your business and submit their best offers by the deadline. They should be of the utmost integrity, and not disclose any of your information or wishes to buyers, they represent you and should operate a very unbiased, blind process that gets you the best offer possible and situation for your future while trying to drive the process along and direct the buyer. Once chosen, an offer that is non-binding has been agreed to and terms are negotiated a bit, then the due diligence process starts. 6. During this process, you the seller, will be busy. Depending on your situation and whether or not your staff know that the business is going to be sold to new ownership makes a big difference here as to whether you or your staff will be working with the buyer in providing the information they need to make a wise decision. They are researching every detail about your business to make sure the large check they write is the right decision for them. Your broker should set up an electronic data room where the buyer can upload their lists of what they need, and the seller’s team can upload all necessary information to suffice those requests. All necessary team members should have access and broker should be helping move the process along amicably. 7. Once diligence is done, the closing process of purchase agreement, accountants and attorneys finishing details, and parties beginning to plan next steps after closing and transferring funds should be occurring. Timeframes vary so much depending on what the asset is that is for sale, and who the interested parties are. In general each of the first steps I mentioned above, outside of the preparation to go to market, and the last one, the due diligence and closing, should each take about three weeks roughly. Preparing should be a few months to a year. The diligence should be about three months. The closing about another month. The part in between maybe 3 months.   
• Culture over $ - Depending on your plans after the sale, the culture mixing of the two parties involved in a transaction can and often is so much more important than the dollar amount, to a certain extent. I can tell examples and explain why, but mostly if you’re sticking around and working with/for the new owner, you don’t want to have a conflict at important times or clashes of opinion and ethics when it’s time for important decisions about the best decisions and paths for the company in the future….. It can be catastrophic and extremely stressful.  
• Preparation - Ask people that have been through it. Ask consultants that build behavioral health businesses. Ask the broker you’d like to represent you what will be attractive to the buyers in the market? What can you improve? What do you already do well that you can make sure to exacerbate? Spend time building a turn-key business that can be sold for what you will need.
• Work with a professional – Pick someone that you like and trust. Pick someone that is honest and will work for your best interest. Pick someone that knows the space you’re in, the buyers, the sellers, the market and its future, has some experience. They should treat you as a high priority.  
• Post Close – What is the plan? What should you expect? What terms have you agreed to concerning non-compete if you’re not working there anymore, or any other claw-backs/risks in your business. If you are still working there, how and when does the role change? What is your responsibility in transition? How does your life change and what are you going to be doing with your time and money now? Be specific and make plans. It is important. I promise.  
• Things that kill deals -- Dishonesty. Not being forthright and upfront, something being ‘uncovered.’ Buyers not having funding (job of broker to ensure). Sellers having loans or many many owners and differences of opinions getting in the way. Bad news stories. Industry and law changes. Unrealistic expectations and demands from sellers. Unprofessional behavior and/or systems and processes. Bad mixtures of culture and personalities. In selling, be honest and upfront, prepare your business and your books/details, be direct but kind in conversations and answer questions directly but no need to talk for hours, be realistic, and put yourself in their shoes, as buyers should be putting themselves in yours as well if they want to win a deal on an attractive asset for sale. Brokers should help with a lot of this and keep deals from dying. If you only talk about ‘what could be’ and the opportunities for your business, realize that while they might like that and it’s enticing, they won’t pay for that, even if it fits perfectly with what they do. You should have made those things happen, or be willing to be paid for what you’ve already made happen, and hopefully have an opportunity to be paid on what could happen in the future…    

General Thoughts on Behavioral Health

• Young vs Mature Market and What it Means – Young is few large players that are way larger, a dozen or so medium sized, and hundreds or thousands of small providers. In a mature market, the largest provider account for half or more of the business in the space.  
• Why Is Consolidation Good? Refer to article I wrote concerning this. In a nutshell, it will provide greater ease of access to care, at a more affordable level, to more people, with more predictable results. Explain other pieces in more detail.
• Breaking Stigma -- The big question. How do we do this? Of course getting rid of the providers making bad news in the space will help. I believe in our current society we live in, it also will require some sort of celebrity endorsement. The more our culture sees people they value (for whatever reason and for their opinion on absolutely any topic they’re not qualified to opine on) spread some normalcy on the disease, the more people will change their minds on what it is. The public opinion will also change when it affects them directly. The public opinion will also change when it is a documented scientific fact that it is a disease. As of now, public opinion still considers it a case of poor decision making. Education will help. In our society, celebrities help educate us for some reason.  
• Things I Don’t See Continuing -- Being paid for providing a service, regardless of whether or not you can show that your service was a success or worked, will not continue in perpetuity. It does not work like that in other industries. At some point, insurance will not pay unless they know that what you do has worked and made a profound, measurable impact. I understand the issue with the word ‘worked.’ I’m not the brains of the operation, just telling you from a business standpoint, it will not continue, so prepare yourself. - The practice of business development people visiting one another at their facilities and taking pictures and telling each other, ‘if you don’t provide this and you come across this type of patient, and we do, send them to us, and vice versa,’ absolutely is not sustainable for pay. There may be some pay, in some way, and it may have some use, but not to its current extent. That is still the same patient, same dollars and revenue. No one has developed new business, you’re just sharing and splitting it differently. Develop business from a new employer contract, people you meet that need it or are referred to you, etc. - Out of network insurance payments have already changed a bit over the past few years, but I doubt to see them around in their current form or amount either in another 5 years. - Technology will make a big difference. -- The destination facility that is all cash pay will be an even smaller amount of the market than it is now, unless the market goes to mostly Medicaid and size/quantity and your middle class patient wants some privacy or space. I don’t believe that will happen, and the beautiful places that are destinations that started some of this space may be great and do great work and be beautiful, but will need to be very independently well funded and have a great inroad to the population that can afford them. It doesn’t seem sustainable at a large scale, maybe at about 2 per state or something.    
• Disruptions, What Do I Expect? What Do You See? -- Technology and Telehealth and such! Less costly forms of treatment, like outpatient, growing. Localization. Digital Health. Outcomes and Results!  
• Market Research -- I’m sure that’s already done in detail somewhere, but who are your patients? Where are they? What do they want? What do they dislike? What makes them succeed? What makes them happy enough to refer friends to you? What would they like improved? What are their attributes? What are their demographics and socioeconomic indicators? How do you reach and connect with them? Ask them for feedback concerning everything!
• Knowing and Considering Cost Per Patient Per Day, Per Level of Care, Per Payor, Per Referral Source, Etc. as well as Revenue Per Those same -- Extremely important information/metrics regarding the financial piece of the puzzle. The quality if the care still reigns supreme but knowing and being able to think critically about and make decisions because of this information makes you more dangerous and your business more valuable. It can help to provide a lot of value and peace of mind.