Associate Partner Discusses Behavioral Health Industry Response to COVID-19 and Planning for a Strategic Transaction

How has the COVID-19 pandemic affected the behavioral health industry? How have providers responded to the spread of the virus, and do you think any of those changes will be long-term?
The coronavirus has affected our industry in a number of ways, both positively and negatively. The most obvious is the need for greater safety precautions, like adding more protective gear for employees; accommodating social distancing requirements; incorporating technology for remote work, telemedicine and digital health; and putting new protocols and procedures in place to manage any contagious patients or employees.

But I think we’ve also seen an increase in patient demand for services, thanks both to the additional stress I think we’ve all felt during the quarantine, and the availability of new, “safer” – and possibly more cost effective – forms of communication and treatment providers have brought online in response to the nationwide shutdown. I think many of these new practices are likely to stick around. Some of the old ways may return – and should – but I think providers will keep telemedicine and some of their other new processes once things are back to “normal.”

From what I’ve seen, the majority of people I interact with in the industry transitioned very well. They were quick to get good advice, implement safety precautions, and adapt to new technology and procedures. I think we’ll see a more cost-effective business model going forward, but I think that will be accompanied by an increase in demand for services over time as the stress of the pandemic continues to affect our patients.

What does the market for behavioral health companies look like right now, and what do you predict for the rest of 2020/early 2021?
The behavioral health market is extremely attractive right now. Like I said, I believe patient demand will increase over the next two years in response to current stressors. We’re seeing new advances in treatment and technology, as well, and we’re getting better and better at tracking patient outcomes.

From an investor’s standpoint, this industry has quality margins, profit potential and longevity. For the rest of 2020, I think we’ll see an increase in census across most sectors in both digital and in-person treatment. The behavioral health field is well-suited to telemedicine, and I think our providers have set themselves up well to continue providing quality treatment regardless of quarantine or travel restrictions.

What are your recommendations for a behavioral health company that is poised for growth and ready to take the next step?
First of all, I think you need to have a good understanding of your own goals – for your company, and if you’re the owner, for your own personal future. Make some decisions about your timeframe and be honest with yourself about your company’s best and worst qualities.

If you’re ready to grow your company by opening additional locations, or by buying competing or complementary businesses you have synergies with, you need to decide which route you want to take. You can be very disciplined with your finances, save up and deploy those funds in the best way possible, or you can raise capital through loans or inviting investors to buy a portion of your business.

The main point is to think objectively and clearly, make plans and goals, and stick to them. Don’t be afraid to seek out expert advice. Make sure you have a solid roadmap that includes clear benchmarks and exit strategies. When you have a plan in place, you’ll be less likely to let personal emotions or what’s going on in the world or the industry affect your course of action.

If you’re thinking about taking that next step right now, let’s talk. It’s my job to take a look at your situation and help you determine whether you should find capital, try to grow organically, become more efficient on your own or buy your neighboring competition. There are plenty of both long- and short-term answers to consider. I can help you think through what’s best for you and which next step makes the most sense based on your goals.

What are potential buyers looking for in a behavioral health company right now?
Buyers want to be sure they can recreate the company’s same income and profitability once they have an ownership interest. That way, they know if they can recognize new synergies, identify cost savings or expand their footprint, they may be able to increase profitability while minimizing their risk.

Most buyers, regardless of market sector or service line, are looking for the same basic things – a solid business with a stable history, as few complaints or issues as possible, a positive culture with good human capital, and some potential runway for growth. Some may be looking for a distressed asset where they think they can provide better operations. Others are looking for something that’s already working extremely well that they can make stronger and add onto.

Part of what I love about my job is getting to know the buyers in our industry and what’s important to them. That way, I can seek out the best opportunities for my clients – when I have a client who’s a perfect fit for the right buyer, everybody wins. I can show that buyer why my client’s company would be a valuable asset for them to acquire and how it will maximize their synergies.

All in all, I think buyers are just looking for companies who do good work and do it well – keep your business reputation as spotless as possible, be honest and transparent about your operations and hire talented people that work well together. Be excellent and efficient at what you provide, and have the tools in place that will help you show your results.

What are some of the most important factors that affect valuations for behavioral health companies?
There are lots of factors that affect valuations, like your company’s size, geography, need for the services you provide in your area, census, income sources, etc. But I’m seeing an acceleration in consolidation right now, in my opinion, and that’s also affecting some valuations. I used to think it would take longer for the space to mature, but now I think that timeframe has moved up considerably. Buyers are more aggressive and want quality assets.

Two things seem to be happening – on one hand, buyers seem to be swarming around providers that operated on fairly thin margins and were just getting by prior to the quarantine shutdown, yet found a way to make it through a pandemic and are still surviving. Buyers know those businesses need help and capital, and the businesses know it makes sense for them to take on a partner and begin to compete and grow. But that may result in valuations that come in at a lower multiple than they would have a year ago.

On the other hand, the providers that were thriving pre-pandemic, had strong cash reserves, maybe even increased their census and made it through quarantine without any big problems are even more in demand than they previously were, have proven some of their stability and resiliency. I believe they will command an even higher multiple than this time last year.

In my opinion, the time is right for these businesses to take an attractive offer and start to build and grow to the next level. Large providers are beginning to get very aggressive in their growth. They’re consolidating amongst each other and buying up smaller operators and competitors. My recommendation would be, if you’re at all considering selling or growing your business over the next year or two, don’t wait. Team up with a quality buyer or find a partner for the future that fits into your culture so you’re not competing with these larger businesses at some point down the road.

If someone was thinking about the possibility of putting their behavioral health company on the market within the next year, what advice would you give them?
First off, I’d tell them I think they are hitting the market at a fantastic time. There’s a ton of investment begging to be deployed in the behavioral health space on a quality asset. So, if they have a solid business – combined with the influx of patients I think we’ll see over the next months and years – I think it’s a fantastic time to sell all or a portion of your business while increasing revenues and profits.

I would also advise them to decide what their goals are, and if after some thought they are ready to go to market or raise capital with the help of a growth partner, then it’s time to begin planning. Stoneridge will help them look at their business and identify its strengths and weaknesses. We’ll work with them to put the company in the best position for sale, with the help of our Strategic Consulting Group or other vendors if needed.

I can’t overstate how important it is to be prepared before you go to market. That’s the perfect time to make sure your expectations, timelines and goals are set, and that you’ve done all you can to make your business appear as strong as possible so it’s attractive to a potential buyer.

From there, my job is to streamline the process so owners can continue running the day-to-day operations of their business while I manage the transaction in the background. I sold my own company a few years ago, so I know it can be a stressful and time-consuming process. I wish I’d had someone to take on the responsibility of finding the right buyer, answering questions and helping with negotiations. That’s why I understand how important it is to have a trusted advisor on your side who can minimize your stress and give you objective advice so you can have peace of mind during the transaction process.

What do you see for the future of the behavioral health industry?
I do get a lot of folks who ask me what I think is comping up for the industry and how to prepare for it. In my opinion, there are a couple of key things we can expect to see.

First, I think we need to realize that telehealth and digital medicine are here to stay in some way, shape or form, and will likely grow substantially. I’m seeing a lot of companies right now offering tech-based apps or programs in the behavioral health space, but they’re still a little siloed. One might be focused on alumni, one on a directory of providers, one on telemedicine, etc. They all have their own value, but I think eventually someone will create good, comprehensive technology that will incorporate all these multiple functions and streamline how they’re used to provide quality care. There’s still definitely plenty of room for technology to change things in this space.

I also think we’ll see some changes in the way providers are paid for their services in the coming years. There’ve been some conversations about only paying for services that are considered “successful” and defining what success really means. I think those conversations will continue, particularly as the market further consolidates. Large providers and payors are used to collecting outcomes data and supporting programs or services that deliver results. They will lean towards setting expectations about certain goals that need to be achieved in order to get paid for your work. So this is a good time to start thinking differently about the care you provide and how you’re compensated for it.

Finally, I think we will need to continue educating the public about the vast spectrum of behavioral health services these companies provide and the positive influence they can have on clients and patients. For example, in the substance use disorder segment, we need the public to have a better understanding of how addiction works and how patients in recovery can live a life that’s full of potential.