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In our Premiere Issue last July, Treatment Magazine asked the
question “Is Industry Consolidation Treatment’s Inevitable Future?”
It now appears, with very little doubt, that that question has been
answered in the affirmative. Following CRC Health Group’s
blockbuster $720 million sale to Bain Capital, announced last fall,
big private equity players are examining addiction and behavioral
health investment opportunities. And some, like American Capital,
are stepping up and paying big money for premier properties.
What this means for well run, private for-profit treatment centers
with strong operating histories is that, at the very least, there is now
a nice strong bid in the marketplace underpinning the value of
their businesses. But unless you have a marquee name like Sierra
Tucson or The Meadows, it is very unlikely that a buyer will pay
the very, very high prices that were shelled for those entities:
$130 million for the 95-bed Sierra Tucson and over $90 million for
The Meadows, which has 74 beds.
Which brings us to a question that is no doubt now on every
treatment center owner’s mind: How much is my treatment center
worth? Treatment centers, like the vast majority of businesses, are
valued on a multiple of cash flow- which in accounting terms is
broadly defined as earnings before interest, taxes, depreciation and
amortization, or EBITDA .
We have often heard here at Treatment Magazine, purely on a
rumor basis, that CRC paid 13 times cash flow for Sierra Tucson,
but when we put the question to CEO Barry Karlin he scoffed at
the notion that CRC paid such a high multiple. “That is absurd,” he
said. “The multiple we paid was in the single digits.”
Talking to a guy like Barry Karlin about valuations is a bit of a
double-edged sword. On the one hand, CRC is the biggest owner of
treatment assets, so Karlin definitely has a vested interest in talking
the market up. But, on the other hand, at this particular juncture
after having just sold CRC and having a growth strategy a lynch pin
of which is acquisitions, Karlin also has a vested interest in talking
the market down. Taking this into account, Karlin says that most
properties have been selling for between 4 times EBITDA and
6 times EBITDA.
To what extent a buyer can employ debt to leverage a transaction
is very much at the heart of determining the potential value of a
treatment business. “A treatment center has to have, at the very
least, $5 million in EBITDA before debt can be raised and
employed in a meaningful way,” said one veteran treatment investor
who requested anonymity. “There is a lot of money sloshing
around out there in buyout funds right now. If leverage can be
employed to goose returns in a particular transaction, these funds
could very well be willing to pay significantly more for a center
than 6 times EBITDA.”
Other investors agree, but add that centers that generate less than
$2 million in EBITDA are unlikely to get more than 3 to 5 times
EBITDA, with centers throwing off between $2 million and
$5 million getting higher prices, in the 4 to 7 times EBITDA range.
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Publisher's Note 
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