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In Merger Boom, Owners Desperately Seek Center Valuations

By: Ted Jackson - Date: 11/06/2013

10/28/2013 -ATIN - We got an email here the other day, one of literally thousands of similar type emails or calls we have gotten over the years, from a business valuation "expert," in other words a guy whose job it is to estimate how much a business is worth. He explained that his South Florida client had just signed a Letter of Intent and the "expert" just wanted to have a "chat" with us about such immensely valuable and hard-to-come-by info like the benchmarking of addiction center valuations and the like. By this time we should be ignoring these queries as a complete waste of our time, but we have a policy at Treatment Magazine of answering every email and returning every call here... so we emailed him he was welcome to call us.

"It is it Valued Per Bed or EBITDA?!!!"

At any given time here at Treatment Magazine we have between a dozen and two dozen "information gnomes" whose sole job is to be on the phone and the Net, 90 percent of the time on the phone, gathering information about the addiction treatment business nationwide and entering that information into a proprietary database we have maintained for almost a decade. Typically, one of our information gnomes would have taken the return call and explained to the above valuation expert gentleman that, for wealthy treatment center owners like his client, only the coffee is free at Treatment Magazine. While we do a ton of pro bono stuff for the charity non-profits, only our very largest clients have the "consigliore" type relationship with us that gives them access to our addiction industry deal and market knowledge. (Full Disclosure: we have also been hired dozens of times by private equity houses and other investors either on retainer or in commissioned M&A work.) But I happened to pick up the call from Mr. Valuation personally. And after the introductions, and before I had a chance to thank him for reading Treatment Magazine and tell him that we couldn't help him, he said: "look I'm just trying to figure out things like how do they value centers? Is it per bed?... or is it EBITDA?... or something else?"  

Too Stupid

We won't bother to explain to our very intelligent and sophisticated readership - about 1,000 private equity and other investors are paid subscribers on various levels and virtually every CEO in the industry reads us avidly - how phenomenally stupid that question was and how it revealed this guy as having zero expertise in the valuation of anything. Accurate valuation is possible only on arelative basis, apples-to-apples. In other words, there are a lot of people walking around who know the price of everything, but understand the value of pretty much nothing... this so-called valuation expert being one of them.

Flailing Around in the Dark

When you are dealing with industries where most companies report publicly, i.e. transparent marketplaces, it is very useful and very easy to get valuation expertise as it is simply a matter of crunching that public data and running a spreadsheet, the value from the hired expert valuation guns coming mostly from their ability to crunch large data series and especially to create "adjusted" data based on expertise of company and marketplace anomalies and particularities. In the addiction treatment business there have only ever been two "pure play" public addictions enterprises. Bill O'Donnell took Sierra Tucson public for a short period in the late 1980s and CRC Health Corp was for a short time a pure play until the disastrous and undisciplined $300M foray into therapeutic schooling brought a big psychiatric element and took the pure play element out of the CRC equation. The point here is that publicly available financial information on the treatment business through SEC reporting has always been non-existent.  And the non-profits treat their statutory obligation to report detailed and timely finances as something they get around to if they feel like it. Thus the addiction treatment market, which Treatment Magazine has identified has having about 3,000 centers worth sending our magazine to and SAMHSA identifies as having 12,000 centers, is the very opposite of a transparent marketplace. It is, in fact, a highly opaque dark market where acquiring information is a highly expensive task done by hand as we have done here over the last decade and one of the reasons I decided a publication like Treatment Magazine would be much in need. And it is a marketplace where small business valuation experts, even if they do understand the concept of relative value and its centrality in valuing any asset, will find themselves for the most part flailing about in the dark.

Lots of Laughs

It is a situation that has created many humorous moments here over the years. Like when a big Midwest non-profit hired an investment bank presumably for big bucks. The bank ultimately called Treatment Magazine because after weeks of digging they still hadn't been able to figure out the national structure of the addiction treatment industry. Or when a business valuation team hired to come up with an industry wide EBITDA multiple produced, after a year's work, 40 pages of literally unintelligible, contradictory gobbledygook that concluded the average multiple paid for treatment centers was an absurd 13x EBITDA. (Anyone who has ever done any M&A work at all in the industry knows that the average treatment center pretty much isn't worth buying at any multiple.)

Ivy League Dumb Ass

Or the Ivy League business school professor, teaming up with a well-known addictions industry expert, who wrote a research paper on the supposed for-profit treatment industry merger boom after we wrote a Special Report about CRC and Barry Karlin in our July 2005 premiere issue. We asked the question: Is Consolidation Treatment's Inevitable Future in the Special Report and we were honored that an exalted Ivy League professor cited Treatment Magazine articles in the notes of his "research" report - except one of the cited Treatment Magazine articles was about the merger of two behavioral health information tech companies, not about the merger of two treatment centers.

The Point

The stories like this are endless after a decade - and 70 print issues - here at Treatment Magazine. The point of all of the above is that there are a lot of very small treatment center owners out there who are desperate to find out what their treatment assets are really worth. And they are not going to find the answer by hiring some generalist business valuation analyst. Not because there are no good business valuation analysts out there but because the highly opaque, hugely fragmented nature of the treatment business, and its immense operational complexity,  makes the methods by which these guys value businesses pretty much useless. The reason being that the information inputs needed to come up with an accurate valuation number require a kind of research digging the vast majority of valuation analysts aren't paid, equipped or even remotely capable of undertaking.  

The Lakeview Deal

By and large, big treatment center owners have shunned the efforts of investment banks to represent them in deals, many of them vociferously telling Treatment Magazine what little value they think such banking entities bring to the deal table. We here atTreatment Magazine have scoured our database looking for an instance where we feel a bank has indeed brought value, helping get a deal done. Shortly we will be examining the role of Ft Lauderdale boutique bank Farlie Turner in bringing together one of the biggest deals in recent years - the Lakeview Health Systems purchase by Texas private equity investors Trinity Hunt Partners  - and how the boutique bank brought critical value to Lakeview's founding consortium of investors.

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