Private Equity and Drug Rehab Investing: What to Know First
Drug Rehab Lead Generation, Drug Rehab Consultants, Addiction Treatment Marketing, SEO, PPC, Social Media, Web Development, Rehab Acquisitions & Private Equity Consulting.

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5 Rules for Drug Rehab Investors

What Drug Rehab Investors Need to Know About Addiction Treatment Before Getting Into the Business

Rule #1:  Every drug rehab deal has hair on it.  There is no getting around it.  Most rehabs are undercapitalized.   Many of the rehabs have trouble filling their beds and keeping them full.  Same holds true for OP’s, IOP’s and PHP’s.  The few that are highly profitable seem to be snapped up quickly.

Rule #2:  Addiction Treatment Clinical Care Counts.  If you have little or no intention of providing the absolute best clinical care the industry does not need you.  If you want to be successful you have to have good clinical care, it will lead you to profitability and help you build a better brand than most rehabs.

Rule #3:  Addiction Treatment Business Process Matters.  The areas that need most improvement in most rehabs are business process, things like: EMR, CRM, Billing, Insurance Contracts, Call Tracking, Marketing, Revenue Lifecycle Management, Alumni programs etc.

Rule #4:  In the drug rehab space it is called “Let’s Make A Deal” and if you go on old tried and true financial models and valuations like 12 months trailing EBITDA you will probably be left out in the cold.  Deals are being made quickly if there is value and if the rehab in a located in a desirable state and location.

Rule #5: The Addiction Treatment Industry is Experiencing Consolidation.  There is a lot of new money entering the addiction treatment space.   Out of network destination rehabs are feeling the pinch.  Insurers are pushing back in reimbursements.  MAT is becoming more prevalent in the industry.  If you aren’t getting better outcomes you can get slaughtered.

If you don’t have any experience in the addiction treatment field you had better hire consultants and pay for the experience.  Too often we have seen well meaning investors enter the space and try and “do it themselves” when it comes to marketing, EMR, staffing etc.  The drug rehab space has many little nuances that are difficult to articulate but certainly show up when it comes to execution.  The industry is a small industry and the old adage “everyone knows everyone” is an understatement.  At the end of the day if your rehab does not convey trust then the clientele and Google and the influencers won’t hire you.  For example, trust is what gets a website visitor to a phone call.  Things like reviews, staff, images, website structure, branding, page speed, colors (yes colors), the person answering the phone all convey trust.  If you try and cheat the system the system, the system will burn you and we see it happen all the time.

Frequently Asked Questions About Rehab Investing

This is a very specialized niche, so investors can’t afford to go in not knowing the ins and outs of how to make a rehab center profitable. There are dozens of decisions to make before you invest a single dollar.

We’ve compiled some of the most frequently asked questions we hear from investors looking into this industry. Click on any question below to see our answer.

Should I open an inpatient rehab, or outpatient rehab, or both?

In a perfect world, it is helpful to offer multiple levels of care. However, if you are buying a rehab facility, some places are strictly set up as either inpatient or outpatient. If that is the case, there would be no reason to change the levels of care until you have seen many months or a year of success.

From a marketing standpoint, it makes sense to have multiple levels of care. You will receive inquiries and calls for interventions, detox, outpatient, inpatient and aftercare. Ideally, you would want to place these individuals in your facility rather than someone else’s. The big challenge is to be able to manage all of these levels of care, and do so effectively.

Should I build or buy a rehab?

As with most business decisions, the answer to this question depends a great deal on the specific circumstances. However, generally speaking, whatever will get you up and running quickly and without tying you down more than necessary is your best bet.

Buying land and building from the ground up is very costly, and there’s no guarantee you will get your money back if insurance companies don’t reimburse you at the rates you expect.

In fact, rather than building or buying, I usually advise my clients to find an appropriate property to lease, and put an option to buy into the contract. This gives you a quick way out if things don’t go as planned, and the opportunity to buy the property if you determine it is going to work for you in the long term.

For more insight into making smart property decisions, read this article on the Top 10 Drug Rehab Real Estate Insights to Follow.

Where should I buy a rehab? Florida, California or some other state?

The answer to this question is, “It depends.” Many people (both addicts and businesses) are drawn to the sunshine states of California and Florida. I personally would look at the business opportunity, and not geography, as the determining factor when deciding to buy.

At the same time, if I live in California and don’t want to travel to Kansas every week, it would make sense to stay in California. In 2017, Florida drug rehabs have been under heavy scrutiny from the state attorney’s office for patient brokering and fraudulent testing practices.

I would be cautious about opening up in The Sunshine State at the moment, because even if you are legitimate, you’re going to have many hoops to jump through.

What prices do rehabs typically sell for?

There are two ways that people value businesses: One is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and valuing on a multiplier of the EBITDA. If the business is making $1 million, it might be able to see a return of 3 to 5 times the EBITDA.

Another way that Wall Street values treatment centers is using a “per bed” pricing method while also factoring in the EBITDA. A rehab facility can sell from $100,000 per bed up to $2 to 3 million per bed, and there are many factors that go into the calculation of these values – too many to be listed here.

What is the right-sized rehab?

To answer this question, you have to ask yourself:

  • What does my exit strategy look like?
  • Do I wish to sell the rehab after three to five years?
  • Or do I want to add additional facilities under the same brand?
  • Am I looking for a long-term play and plan to sell 10 years down the road, or do I just want to own a six-bed facility?

So the answer to this question is if your strategy is to sell the treatment center at some point, we recommend you enter into the rehab business with 20-plus beds, if it is an inpatient facility. The reason we recommend so many beds is for economy of scale.

We know that investors down the road will be looking for larger headcount facilities because more and more rehabs will be going “in network” with insurance. And what that means is lower reimbursement rates.

What is the best reimbursement type: in-network, out-of-network or cash pay?

That is a good question. Again, it depends! Out of network has the highest reimbursement rate; however, more investors are looking to buy rehab centers that are “in network” with the insurers because the insurance companies do not want to pay the out-of-network rates.

Cash pay is great, but usually people do not have the funds and so reimbursement is usually less than an insurance company payment.


Use Our Deep Drug Rehab Network and Subject Matter Expertise to Help Your Addiction Treatment Investment Flourish

With over 35 years in marketing and over 10 years in the addiction treatment space since 2008 Addiction-Rep has been fortunate enough to help over 100 different addiction treatment centers in several different consulting arrangements. We originally started out working with an addiction treatment directory that served 1,000’s of different addiction treatment centers. We have been helping drug rehabs with their lead generation marketing and as the industry developed more investor money started showing up at our doorstep.

Many drug rehabs were under-capitalized and had a difficult time competing with the bigger players and the new money coming to the space. It because natural to help consult with investors and drug rehabs where the potential is for the best possible fit. We have experience with HIPAA compliant CRM’s, EMR’s, Billing Solutions, Zoning, Licensing, Certifications, Marketing Solutions and much more. Where we don’t have experience we are happy to refer you to our many best in class experts and consultant to assist you in the execution in your new venture(s).

Addiction-Rep Can Assist You with the Following:

  • Determining if the drug rehab acquisition will meet your investment goals
  • Connect you with rehab owners who are interested in exiting their business
  • We can assist in writing addiction treatment business plans, addiction treatment marketing plans, addiction treatment policies and procedures, pro forma and financial models
  • Picking addiction treatment center locations and getting them zoned and licensed

Bottom line: We will save you a ton of time. We can help you scale your business through advanced systems that have already been proven. We have the data to back up our recommendations.

How to Get Started in Rehab Private Equity

There’s a lot to know to be successful in the rehab industry, but here are a few key areas in which you can get started.

1. Plan to Start with One Facility – Even if your goal is to invest in 20 drug rehab centers, start with one first to get to know the business, then scale what works. Trying to do too much at once is a recipe for disaster.

2. Get Educated and Do Your Homework – You’ll need to understand the legal and health insurance requirements for your state. You’ll also need to learn about zoning and licensing, HIPAA compliance, real estate requirements, staffing and what type of marketing can keep the beds filled.

3. Start Building Your Team Now – As with all businesses, the team is just as important as the investment itself. Start making connections with key players and experts now, so you’ll be ready to move quickly when the time is right.

4. Plan on a Big Marketing Budget – Because there’s a lot of competition in this space, you can’t afford to skimp on the ad budget. Having a marketing partner who knows this industry well will also go a long way toward making sure that your money is spent wisely.

Still Want to Move Forward?

If we haven’t scared you off yet, then it’s time to talk. Send us some basic info about your investing goals and questions you have, and we’ll set up an initial consult with Jim.

Jim PeakeKind Regards,

Jim Peake
President, Addiction-Rep

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