As M&As have slowed in the addiction treatment space in recent years, many owners, investors, and entrepreneurs in the behavioral health space are accelerating their search for a “sweet spot” between deal flow and business-friendly regulation.
It’s fair to say that this search is proving to be a difficult one.
In this post, we’ll examine why the “sweet spot” is hard to find. Then we’ll offer some pointers on what a smart business strategy in behavioral health looks like today.
Here’s why finding the sweet spot between deal flow and business-friendly regulation is so difficult in the addiction treatment space
A wise woman once said: “Good, fast, cheap. Pick two.”
It’s an age-old paradox. And you find it everywhere, even in the behavioral health business.
When you’re choosing where to invest, where to grow, or where to expand in this space, you’ll run into this paradox again and again.
Let’s say you’re looking at M&As deals in the addiction treatment space.
You’re looking for valuable deals, sifting through the duds to identify organizations and micro-markets that are worth your attention. You become discouraged because every valuable prospect you encounter is “overvalued” and the process of identifying and/or evaluating these prospects is taking way too much time.
You’re not getting anywhere, so you switch your focus to “quick and easy” options. You’re spending a lot less time doing networking, research, and due diligence but now all of the prospects you’re encountering are not only low-quality in some major way, and/or they’re “overvalued.”
You need to pivot again. Now you start looking for “bargain basement” prospects, prioritizing the price tag above all other considerations. Foiled again - you’re back to investing way too much time into your dealmaking and all of the prospects you’re able to identify are now suffering from unacceptable M&A timelines. Not only that, but, too often, the quality of all of the prospects you’re finding - whether it’s their clinical reputation, their patient outcomes, or some other important factor, like the business-friendliness of their regulatory environment - is unacceptably low.
What now?
If this story sounds familiar, you’re not alone. This is the “good, fast, cheap” paradox that everyone looking to make deals in the addiction treatment space faces. This paradox explains why it’s so difficult to balance factors like deal flow with business-friendly regulations for dealmakers in the behavioral health community.
States that have a high demand for addiction treatment services tend to be the same states that have a lot of regulations constraining the growth of addiction treatment business
As a general rule, states with large deal flow potential and states with high levels of regulations are the same states.
For example, the deal flow potential for addiction treatment in California is huge. California is home to a vast population and many of those people need SUD services. California has a Medicaid program, Medi-cal, that supports relatively robust addiction treatment coverage for a large number of potential patients. There are also a large number of addiction treatment organizations in California. The sheer volume of organizations in the Golden State all but guarantees that you’ll find more owners and investors looking for an exit or merger in that state than you’d find in a smaller state.
However, California also has one of the highest level of addiction treatment regulations in the United States, with more regulations being added all the time.
(And if that doesn’t scare you, then you may be interested in our blog post on how to open an addiction treatment center in California.)
Compromise, creativity, patience, and networking are the keys to finding the sweet spot between deal flow and business-friendly regulations for addiction treatment
The truth is that the “sweet spot” between deal flow and business-friendly regulation in addiction treatment dealmaking will be different for every dealmaker. There will be themes, and some commonalities, but ultimately your sweet spot will reflect the specific resources that you’re willing and able to leverage in your strategy. Time and again, at Behave Health, we’ve seen that our clients’ best tools are usually their creativity, their resourcefulness, and the strength of their network.
That’s the long answer. If you’re looking for the short answer, then you may want to take a look at Texas.
Texas has a relatively high demand for addiction treatment and a very business-friendly regulatory environment that doesn’t seem likely to change any time soon.
One caveat: It’s likely that you’ll be competing with many other dealmakers who are also looking for that “magic bullet” in Texas!
Other blog posts on regulations, deal-making, and market forecasting for the addiction treatment community
Update on Trump's Recovery Residence Policies, and What the Future May Hold for Sober Living
Is Your Addiction Treatment Organization Ready for the DEA's New Telemedicine Rules?
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