Home Publisher's Note Addiction Treatment EBITDA Multiples
Publisher's Note
Addiction Treatment EBITDA Multiples
February 2006

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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