Inside a Failing Rehab Acquisition: Utilization, Insurance & Red Flags

0:00Hello, ladies and gentlemen, boys and girls. Welcome back to Acquisitions Anonymous. This is the internet's number one podcast on buying, selling, and operating small businesses. I am one of your hosts, Bill D 'Alessandro, and I am here today with Chelsea Wood from Acquisition Lab, with Heather Endershen and Mills Snell, and we are talking about a substance abuse clinic in LA County, Los Angeles, California. This is a fascinating space. Three-week stays for about$30 ,000, to give you an idea. This business has a couple million bucks of EBITDA, pretty good margins, and it's also space that I've written a check into and know somewhat well.

0:39Small check I will add. But really interesting episode, interesting space, interesting business model. So I hope you enjoy this episode of Acquisitions Anonymous.

0:58Big thanks to High Level for sponsoring this video and helping us pay for our editors. High Level is the all-in-one CRM that handles your emails, text, funnels, and more all in one place. Think of it like the Swiss Army knife for small businesses, and you can try it for free for 30 days at gohighlevel.com slash Michael Girdley. All right. It's a Tuesday. I felt like a Friday to me, but it's a Tuesday. Tuesday Acquisitions Anonymous. How's everybody doing? Wishful thinking. Yeah. Well, it's the end of the day. It's almost 5 o 'clock Eastern. I guess I'm feeling good today. I don't know. Heather, have you got a new microphone or just a new arrangement?

1:32It's a new stand because the other stand was broken and it was falling apart half the time I was on here. So it's just a new stand. Very fancy. Chelsea, you have a new backdrop too. What's going on there? It's just my office. It's just, I'm in a different office. I have three. Nice. Oh, I like this one. It's got cool art and fun yellow chairs. That's the bookshelf. I normally just space this way in this room. I'm too lazy to do that today. So this is actually what I look at when I'm in here. Okay, nice. Well, this is a fun deal. So I don't know if any of you guys have ever done a deal like this, but it is a rehab center.

2:11Heather brought this to us straight out of California, the home of rehab centers. Are there more there than anywhere? Probably. Probably. High end at least, for sure. Yeah. Yeah. So we're going to talk a little bit about, I think, what makes a good one and what makes a bad one. All right. I'm excited about this one. because the picture has a pool table also. So it looks like fun. It does look like fun. I think that's part of the idea. Okay, so it's Drug and Alcohol Rehabilitation Facilities, Los Angeles County, California, asking price$4.5 million, cash flow SDE$1 million, gross revenue$4 million, established in 2022.

2:53Detox and residential, two locations in LA County, 12 beds. This is an established drug and alcohol rehabilitation business operating two licensed facilities with approximately 12 beds across Los Angeles County. The company has been continuously operating since 2022, generating$4 million in revenue and$1 million in SDE. The facilities are joint commission accredited and DHCS licensed, providing a full continuum of care, including medical detox, residential treatment, and aftercare planning. The business serves adults with substance use disorders and co-occurring mental health conditions, such as anxiety and depression through PPO insurance and private pay arrangements.

3:34The clinical program offers comprehensive evidence-based therapies including CBT, DBT, EMDR, and family therapy complemented by holistic wellness services such as yoga, meditation, and massage therapy. The experienced clinical team has established strong treatment outcomes contributing to the facility's reputation and referral network. Key operational strengths include the scalable high-margin business model and established patient base. The facilities maintain proper licensing and accreditation standards while serving a critical need in the Los Angeles healthcare market. Significant growth opportunities exist through launching vertical intensive outpatient programs and alumni services, strengthening marketing and referral networks, centralizing administrative functions, adding medication-assisted treatment services, expanding wellness programming, and pursuing strategic acquisitions.

4:28The current ownership team is committed to ensuring a smooth transition with a day-to-day operations manager willing to stay and provide training for up to one year with compensation. The finance and accounting owner is also available for transition support as needed. This represents a turnkey opportunity to acquire an established healthcare business with strong financial performance, proper licensing, accreditation, and significant expansion potential in the growing addiction treatment market. Let's see. It says, as far as additional information, 17 employees, 13 full-time, four part-time support and training.

5:04The owner who operates the facility's day-to-day operations is willing to stay and train for up to a year with compensation. The other owner runs the accounting. So it's the two owners, I guess, that are the folks that they said would transition. And one of the owners was previously retired from another career and would like to, it drops off, to B, just the letter B. And so they don't finish that sentence. What do you guys think? So I actually, I was able to find the listing and there's a little bit more information, including some high level financials, which I would like to share with the listeners.

5:38So what's interesting is this place did 2.3 million in sales in 2022, 4.1 million in sales in 2023, 4.7 million of sales in 2024, but womp womp, pro forma 2025, 3.7. So we're down year over year from 4.7 to 3.7. They are, of course, forecasting growth again to$4 million for 26, and then interestingly, flat revenue again in 27. Oh, I like that. I do like that, but I'm interested as to why. So a couple things to note here. Their EBITDA margin has kind of stayed between 18 % and 21%. Their EBITDA margin is actually up from 18 % to 21%, from 22 % to 25%. but they have forecast a jump in 26 and 27 to 28 percent in one year.

6:34And I have a sense it is probably because they forecast their utilization going from 53 percent to 63 percent. I love that they include that in the teaser. We haven't signed an NDA just as a reminder, like one of the core of the podcast, but they give us the occupancy and utilization. Yeah. So the utilization has trended from 2022, 78%, 23, 64%, 24, 58%. So declining utilization at a time when their revenues went from 2.3 to 4.2 to 4.7. So that's interesting. And then they are, then they're down to 53 % utilization from 58 and 24. And then they forecast a jump back to 63%, which was their 2023 utilization rate.

7:22It also looks like their average length of stay is almost entirely flat at about 21, 22 days in treatment. And then their average daily revenue per patient is anywhere about 1400 to 1500 bucks. So a little bit of math will tell you that this is a$30 ,000 stay over three weeks. yeah right uh so that's a that's a big beds y 'all that's what they said in the in the biz by cell listing there's only 12 beds well what's interesting is 12 beds but they're you know not even two-thirds utilized so that means they're like between like six and seven patients like almost all the time uh have you ever looked at one of these before i have invested in one of these actually, Mills.

8:10Yeah. Capital Pad had a rehab deal, which I participated in. So I'm a very small investor in one of these in Ohio. I have looked at them. I think I've said this on the podcast before. Lenders tend to be extra conservative about this industry and specifically because they're concerned about reputation, reputational risk. There are some that are known to be like mills where they, you know, the doctors just keep sending the same patient back through and letting the insurance pay for it again and again. So that like the industry has some things to overcome when it comes to lenders wanting to put a loan on these.

8:50So that's one component of it. I do think, you know, the revenue per patient is kind of an interesting metric that you'd like to have. It's nice to have the utilization, but it also kind of seems to be like they're getting more per patient now doing something. And you'd want to know what are those services. Maybe they've added on a few things. They talk about a few other things you could add on. And then, of course, ultimately, the one metric that's missing here that lenders would really care about is how much is coming from insurance in terms of the revenue versus private pay. The lenders will view the private pay a little more favorably if they're serving an affluent kind of marketplace like Los Angeles, where we know there's lots of people who can just afford to come out of pocket.

9:40If more of it is insurance dependent, it's a little less desirable to the banks because there's all those reimbursement rate risks that might come into play in the future. Yeah. So there's an interesting sentence in here, which is important. The The business serves adults with substance use disorders and co-occurring mental health conditions such as anxiety and depression through PPO insurance and private pay arrangements. So one of the names of the game is basically how many billing codes can we rack up per bed per day, right? So if somebody's in there, I'm treating there for alcohol, alcoholism.

10:14Oh, do you also have anxiety? And I can, maybe I can't bill insurance for alcoholism, but I can bill insurance for anxiety, right? So I would want to understand how much of their business model is treatment stacking and billing code stacking. And I would be willing to bet you have a mix of private pay and insurance even within the same patient. Yeah, very likely. We've had a member buy something similar. And I think all of the things in healthcare-related spaces always make me, I have a gazillion questions, but the one thing that no one ever seems to talk about. And so I'm curious to see if somebody corrects us or says something in the comments is, I don't know if you guys are in Bill, if you ran into this, I don't know if Ohio is a corporate practice of medicine state, but CPOM restricts the ownership of anything in the healthcare space by someone not carrying the license.

11:08But I feel like no one ever mentions that in these listings that I've had members going through the process with a broker to buy a company they are not qualified to buy. And then they get through this little dance to the end where it's like, oh, you're not buying this company. You're going to spin out this service model and the physician's going to keep the practice and you're going to be like the back office DSO, MSO model. And so I just don't know why it's never talked about in this space. Right? Well, I would imagine if you need a license, it functionally makes it non-transactable, right? Or much more limited as far as your buyer pool.

11:43So, I mean, I'm going to assume that since we're seeing this, that you can buy this if you're not a doctor. But you can't. I just checked. You can't in California. Yeah. And so I'll give you my two cents that and I've talked about this with some pretty good experts as far as lenders in the space. In fact, there's a there's a non-bank lender that I know in the Northeast whose spouse is a physician. So she's very, very good with these kinds of topics. And MSO, a medical service organization, to my understanding, is a workaround around those regulations. Right. So it's all about tolerance for risk.

12:23If you feel you and your lawyer and your lenders and everybody feel that the way you've structured your MSO relative to the way those local rules read is still compliant, then people go ahead with it. We see it done all the time. The lender that I know in the Northeast said, interestingly enough, there was a case where this was challenged in New York in the last couple of years, I think. And New York is one of the states where you don't want to do an MSO because the judge ruled, no, you're just getting around the regulation, therefore you're violating the regulation. So that's the risk, you know, that somebody really challenges you on this and says you're not really complying, you're just doing this workaround.

13:06But no one's disclosing that it's the workaround is my problem. Like nowhere in here does it say that you're buying a company to spin off an MSO, a DSO is the dental, managed care is the MSO. And so that's my problem. As our members get through this process only to be told, oh, well, it's not actually, you're not buying the clinical practice. You have to start this other entity that's a service organization. And so I don't know if you're actually buying this if you're not a doctor or somebody with the licensure, right? Or if they're going to be actually telling you you're going to be starting a service organization that serves it.

13:42And I have concerns about that because it's basically a startup and you're hoping that it works, but like that's not, you're not acquiring this company. And healthcare related in general is just, I always refer our members immediately to a healthcare attorney because I feel like this is a space that doesn't seem to be very clearly articulated in the, when somebody's broking a deal. Like I had a member push, like push back on the broker with the proof that it couldn't be owned by them. And they're like, it can too. It's fine. So I had him talk to a lawyer and go to the broker and the broker's like, it's fine.

14:12And I think we all know that, you know, there's no standardization for education, but this is one space that really bothers me and I'll get off my hand horse now. Sorry. No, I think that's so good. And I think this is one of those things. Like if you look at deals long enough, you come across one of these and you don't know it and then you pay the tuition and hopefully it's before you had much sunk cost but like in looking at deals you just come across these different and you could talk about it in the deal world like everybody at some point has looked at like a FedEx route or something you know there's just these things and like non-medical people looking at medical practices and going huh how hard could it be and then you double click on it and you double click again and you have brain damage and you're like, oh, it's really, really hard.

14:58And this is where I tell our clients to go to the Acquisitions Anonymous website. If they're looking at an industry that I know we've got episodes for, I say, just please go listen to a few of those. And then let's talk after you do that. And there's a couple of things that I'm super interested about in this listing. And one of them is it's probably going to have to be a stock sale. If there's contracts and healthcare related space, most of the time you want those to be stock sales to maintain them, right? Otherwise, it's a huge delay in your billing process. And so what's the inherent risk, right, of buying a rehab facility, right?

15:38Because you're taking on any potential risk that they've ever exposed themselves. And it feels like an area, I mean, I'm coming out of healthcare, that's where I started as healthcare M &A. But it feels like one that I would be a little nervous about because there's a lot of liability and a lot of things that can happen inside these spaces that you would be potentially exposed to. Not saying that they're responsible, but it feels like an environment that might have a lot of risk inherent in it. So a stock sale would be a little concerning for me as an individual. That's a great point. I think when you strip these down, kind of the stigma aside, it is a really interesting, really compelling business.

16:21Inpatient or outpatient. In this case, it's inpatient. You're going to go and you're going to stay there for 21 days. You're going to be there three weeks. And alongside some structure and some behavioral and soft related things like counseling and probably meal prep and all these kinds of different things. They're going to bring in practitioners who probably aren't full-time employees to provide some kind of clinical therapeutic type care. That is a really great recipe to be able to charge more than like a hotel, right? That would be the base case is you just go stay in a hotel for three weeks and your problems don't go away.

17:01They get worse. So we're going to provide all this structure and charge for it. It's a really interesting blend, but it's so hard to remove the stigma of what has happened in this space, which is exploitation, maybe not so much of the individual initially, but of the payer, you know, the insurance company. And obviously insurance companies are really smart. They have a lot of capital at their disposal. And at a certain point they go, hey, we are going to re-rate the risk or we're going to change the payer-payee dynamics. But what I like about this, stigma aside, is it is increasingly prevalent.

17:40People aren't using less opioids, right? Like, it's just a growing trend. Hey, Michael here. This episode is brought to you by Tonninson Accounting Services, the leading provider of quality of earnings reports for small and mid-sized business deals. Every year, their team reviews over$500 million in transactions, and the reports are trusted by buyers, bankers, sellers, and brokers nationwide. What sets Toninson Accounting Services apart is premium quality work at an unmatched price, a full quality of earnings report for just$6 ,000. You'll get more depth and insight than firms who charge twice as much, which is why so many dealmakers turn to Toninson Accounting Services when accuracy and speed matter the most.

18:19There's a link to toninsonaccountingservices.com in the show notes, or reach out to Josh Toninson on LinkedIn for a free consultation, where he'll walk you through the process step-by-step and answer any questions that you have. Tell them that Acquisitions Anonymous sent you. Mills, I pulled some industry data from the deck, from our investment deck, when we invested in the Ohio Center. So yearly deaths per 100 ,000 people in the United States from all drugs have gone from 6.1 in 1999 to 32.6 in 2022. And it's probably up from there. So this is a a strongly growing market, right? And it's, you know, this, that's all drugs, which includes opioids and fentanyl, which is definitely driving it up, which the facility that I invested in was skewed more towards some of the narcotics than alcohol.

19:12But, you know, at the end of the, so it's a growing bit, it's a growing industry. And at the end of the day, what this really is, is a utilization game, right? How many beds do you have? And how can you keep them full? and how many dollars per day can you extract from each bed, right? That's the very basic Excel model behind this business. Now, of course, in order to keep your beds full, you need a really great lead flow. In order to have really great lead flow, you need to have established results, right? You need doctors to be sending you leads. You need people to be, you know, Googling it and hearing from their friends.

19:46And, you know, hopefully you don't have a ton of recidivism and people keep coming back. So you need to actually be good at your job, which is getting people better. But ultimately, as I look at this business and I think, oh, geez, their utilization is half. They're 53 % utilization. And their dollars per bed is 1 ,400. I am not even coming close to buying this until I have really good visibility and making both of those numbers go up. You got to go into this with a plan to go, how do I take occupancy from 50 % to 80%. And similarly, if I do take occupancy to 80%, what other problems come along with that?

20:28Because this facility has almost never been 80 % utilized except back in 2022 when it was doing half the revenue. And that's what's weird is it was doing half the revenue on higher average revenue per patient. In 2022, it was doing 2.3 million in sales at 80%, almost 80 % utilization and$1 ,500 per day per patient. In 2025, it's$3.7 million revenue, so 50 % larger, but it's only at 53 % instead of 80 % utilization. And average daily revenue per patient is down from 55.50 to 14.62. So I have real questions about how this business has grown revenue 50%. There's some variable we don't have. It's like maybe other fees or something, that doesn't go into the average daily revenue per patient.

21:18I don't, there's gotta be something that we're, there's something going on here. Yeah, the million dollars lower revenue just doesn't make sense, but the margin stays the same pretty much. The 25 fiscal year needs a big explanation. Very hard to understand what happened there. But you gotta think. I think the 22 fiscal year needs a big explanation also. Like how are they that utilized and so small when now if we were that utilized now, we could be - One facility. We did two locations now. Yeah. But your utilization should impact that, right? So you think the denominator has gone up? Like they just have more.

21:56So there's no location. They went from six beds to 12. Yeah. Okay. Yeah. So they've added more empty beds, basically. If you imagine the spectrum of service providers on this continuum, this is probably as good as it gets. really high income area, very high income demographic. Like this has to be the cream of the crop. The lower end would be, you know, Medicare, Medicaid reimbursement only or something like that, that probably has a really, really low reimbursement rate from an insurance. So for what it's worth, Mills, without disclosing too much, I can assure you that this is not the cream of the crop.

22:32Really? No. This is not for Los Angeles. It's not. Yeah. No. So again, my numbers are not from LA, but these EBITDA margins can be double digits higher. I mean, you could be north of 30 % EBITDA and you can be significantly higher in revenue per bed as well. So I would call this sort of a mid-range facility. And when you look at - messiness of the, like the type of work that is being done and not to like, you know, completely remove all the emotion out of it, but I'm just trying to think about it from a business case standpoint. I think as you book, as you deal with messier and messier interpersonal issues and, and, you know, the, the, the issues people are bringing to bear, you're probably adding structure and it looks a little bit more like a behavioral health facility or a mental health facility, right than it does like a lived in, you know, bougie.

23:33Well, the, well, so let's, maybe we've got different definitions of bougie. What I see on the screen here is a nice Airbnb. Yes. Right. For the most part. Yeah. This isn't EG or something like it. It's a yoga retreat. It's not a Malibu. Yeah. Yeah. I think I get the sense, Heather, maybe you've been to some of these. I don't know. I have looked at the Malibu high end ones and I will tell you, yeah, the, the, the, the numbers are much, much higher. Yeah. And what they feel like Mills is they feel more like the four seasons or, you know, or they feel like staying at like a Monticello type, you know, like a state where you're in a nice house and it's like a really luxury accommodation, but they just happen to be with staff, you know, that are helping you get over your addictions.

24:21So I would call this decidedly mid range. I have not seen like behind the curtains on like a low end one that would be like all insurance pay, like really low end. That I think would be a tough business. I mean, that's, that would be a volume business. And I think it would be just hard to have good, good outcomes, you know, at that, at that end of the market. But I'd say this is kind of, kind of mid market. And of course they all say it's high end, et cetera. But, so I would want to understand like who is my clientele? Where do they come from? You know, what are their financial means? And I would really want some comps.

24:58as well, just to understand, you know, cause you, you've seen one deal, you've seen one deal and Michael isn't here with us today, but he's always the one that bangs the drum and says, if you want to buy a business, you better look at 10, just like it. Right. And talk to all of the owners and understand, you know, get some comps, understand relatively what's good and what's bad about the business that you're trying to buy, because the seller is going to tell you everything is fantastic and their best of breed and top of their industry and all that stuff. and that's and the broker is certainly going to tell you the same so this would be you know if i was interested in investing in this i would want to see behind the scenes on several others both in this kind of band like mid-market i'd also want to see the high-end ones and if i if i could i'd like to see a low-end one too and then also see geez what are they doing like what are they getting revenue per bed like what's realistic revenue per bed what's realistic on like do all these operate I'm telling you, you can, like, I know you can operate at higher utilizations and 53%.

25:54So like, that's a plus. I mean, these guys, maybe they just built some more beds. Like, let's fill them up. Like there's some growth here. Are there like hundreds of these though? It depends a lot on what you mean of these, like of, you know, of substance abuse centers, like broadly, like, yes. of nice Airbnbs, some. Of like super high-end, the Malibu one, like Heather's talking about, not really. Like a small handful, you know, within whatever radius of LA. So you got to kind of define your competitive set here. I mean, this is only 12 beds, you know, so you figure how many total beds are there in Los Angeles County.

26:36It's probably, you know, many thousands at all the different levels, the different tiers of cost and level of service. I have no doubt that you have, you know, plenty of demand. No problem there. You have demand. It's, you know, a mix of private pay and insurance. As long as you've got the insurance side kind of mastered, you're going to have plenty of demand. I think one of the other constraints is staff. You know, keeping yourself staffed is a huge constraint in this industry. Even the professional staff that's got to do some of the treatment, that is tricky too. So I think that's probably a big constraint.

27:19When they went from six beds to 12 beds, which we presume they did somewhere here, it would be interesting to know how quickly did they get the utilization up on those other beds and what was the challenge? Was it finding patients or was it finding employees? Yeah. It all leads me to believe that the best possible buyer for this is somebody that's already doing it in LA. They probably don't, we haven't talked about price really that much, but four and a half million dollars on a million dollars in, I think they say EBITDA, not SDE, just seems like a reach for something that has a lot of transition risks, a lot of compliance and regulatory hurdles.