Private Equity's Growing Interest in Behavioral Health: What Practice Owners Need to Know

When transitioning your ownership and relieving yourself from the daily stress of managing your behavioral health practice, Private Equity Groups (PEGs) may be the best option, as there could be a second bite of the apple waiting for you with equity rollover.

Understanding the private equity business model and its impact on your exit will help you navigate the many considerations you must evaluate before deciding who to sell your life's work to. For example, understanding how a Private Equity group will value your practice based on factors like Earnings Before Income Tax Depreciation Amortization (EBITDA). And how the alignment of values with the private equity group's vision for patient care and future growth is vital.

This blog aims to share insights into how selling your behavioral health practice to a Private Equity Group could be an investment strategy for the PEG and you.

What is a Private Equity Group?

Simply put, PEGs are sophisticated investment vehicles that pool capital from multiple investors to acquire and manage a diverse portfolio of businesses. These groups operate through specialized funds, often maintaining numerous funds across various industries. PEGs leverage a combination of investor capital and debt financing from banks and other financial institutions to fund their acquisitions.

By consolidating multiple practices into their portfolio, PEGs seek to improve operational efficiency, expand service offerings, and increase the value of their investments in the market. There are an estimated 4,500 PEGs in the US alone (approximately 700 that focus strictly on healthcare), and the vast majority are considerably smaller than the giants such as Bain Capital, KKR, and Blackstone.

Private Equity Groups' Basic Strategy

PEGs typically use a strategic approach in their investments:

 1. Platform Companies: PEGs often acquire a primary company in a specific sector as a foundation for future growth.

 2. Bolt-on Acquisitions: Complementary businesses are then acquired and integrated into the platform company, enhancing its value and market presence.

The platform company's value is significant, increasing much higher than its EBITDA's growth rate. Another way is that if the platform company's EBITDA increases fivefold, its value will increase by a rate much higher than fivefold.

Allow me to provide the following example:

• Generally speaking, a Behavioral Health practice with an EBITDA of $500,000 to $1,000,000 has a market value range between a 4x and 6x multiple of its EBITDA (countless factors help determine what part of that range a given practice will sell for).
• Now, let's say a PEG has acquired 30 Behavioral Health practices in the $500,000 to $1,000,000 EBITDA range over 3 or 4 years. The platform company would grow to $15 to $30 million of combined EBITDA.
• At that size, the value of the platform company can be worth as much as an 8x to 12x multiple of EBITDA. In other words, the platform company is worth roughly twice as much as the 30 individual practices.

Are All Private Equity Groups the Same?

No, not all PEGs are the same.

Most PEGs employ a "buy and flip" model in which they build their funds for 3 to 5 years and then "flip" it to another buyer (typically, a much larger PEG). However, a few PEGs employ a "buy and hold" model in which they will keep their fund intact indefinitely. The former is more common because investors in the fund do not typically want their investment tied up for more than 5 years, and selling the platform company is the simplest way of cashing out their investors.

Do Private Equity Groups Aim to Acquire As Many Bolt-Ons as Possible?

Not really. Growth through acquisition is just one part of the strategy and economics behind PEGs. It is just as important to them to acquire Behavioral Health practices with crucial elements in standard with their prior acquisitions (such as a similar patient philosophy, company culture, and core services provided). Why is that so important? Because PEGs look to further increase the EBITDA of the practices they acquire by:

• Centralizing certain functions that increase efficiencies and lower operating costs.
• Taking advantage of increased purchasing power to drive down the cost of services.
• Implementing relevant "best practices" for all their bolt-ons that have proven successful throughout their platform.
• Investing in organic growth makes sense (such as opening additional locations or expanding existing ones).

Done correctly, this further accelerates the EBITDA growth, creating an even higher value for the platform company when it comes time to sell.

Why Are Private Equity Groups So Interested in Behavioral Health Practices?

In the behavioral health sector, PEGs have shown particular interest, with many funds focusing on specific niches such as:

• Substance abuse treatment centers
• General outpatient mental health practices
• Specialized areas such as family counseling

These funds aim to create cohesive groups of behavioral health practices that share critical operational and clinical standards to find synergies and economies of scale. Private equity groups are looking closely at fragmented industries that offer strong long-term growth potential, and the behavioral health sector fits this description perfectly.

In the medical space, PEGs previously identified Dentistry, Ophthalmology, Optometry, and Cardiology (to name a few) as highly fragmented healthcare providers, and they have been consolidating or "rolling up" these specialties for quite a few years.

• As of 2024, estimates were that Private Equity or a larger entity owned 6% of the approximately 12,000 Behavioral Health practices in the US. To Private Equity, this equates to a highly fragmented industry ripe for consolidation.
• Now, factor in that the overall size of the Behavioral Health industry (currently estimated to be $83.7 billion), its high-profit margins, and its future growth projections (estimated to grow to $136.6 billion in 2032), it's easy to see why Private Equity has become so active in this industry.

What Else Should I Know Before Selling My Practice?

In talking to practice owners over the years, I believe the most critical item that gets glossed over is the financial impact of the sale to the owner. Knowing how much your practice will likely sell for is not enough. You need to know how much of the sale price you get to keep at the end of the day after taxes, fees, and transaction costs are considered.

At True North Mergers & Acquisitions, we have created a proprietary valuation system called the Compass Exit OpinionTM that will give you a realistic estimate of what your practice is worth and help you determine if selling your practice will meet your financial goals.

Learn more about the changing landscape of Behavioral Health Practices by connecting with Randy Krivo, the Managing Director of Medical Practices at True North Mergers & Acquisitions. Randy deeply understands professional medical practices, particularly optometry, behavioral health, medical spas, and plastic surgery.