How to Price a Behavioral Health Business for Sale: A Comprehensive Selling Guide

Pricing a behavioral health business for sale while selling is the most critical, financially consequential decision because of the niche and heavily regulated industry like behavioral healthcare. Yet most of the business owners have no clear roadmap for how to price a business for sale. A lack of pricing strategy can result in undervaluation, delayed sales in case of overpricing, and selling under financial pressure. This is why this blog covers in greater detail the question of how to price a behavioral health business for sale. 

Get help with pricing your behavioral health business for sale with selling experts at Strategique Partners!

Why is Pricing a Behavioral Health Business Before Sale So Significant?

When you decide to put your behavioral health business, like a mental health center for sale or sell a drug rehab center, you will realize that traditional formulas for behavioral health valuation do not work well. This is mainly because of the reasons we have collected in the following lines. Additionally, these factors also make pricing so significant in the process of selling a behavioral health business:

1. Behavioral health workforce shortage in the USA
2. Fluctuating reimbursement rates
3. Problems in compliance 
4. Evolution of the market towards outcome-based payment 
5. Differences in regulations by states 
6. Multistate licensing is required for telehealth services

These factors tell us that a behavioral health business cannot be priced like any other generic business, like a restaurant or a retail shop. 

How to Price a Behavioral Health Business?

Identifying the authentic value of your business is a complex process, which can be done through expert behavioral health business valuation. You will be required to have a plan that includes everything about pricing, from developing an understanding of the available valuation methods to factoring in all value drivers. 

1. Understand Common Approaches to Pricing that are Used in Behavioral Health Business

Behavioral health mergers and acquisitions utilize various valuation methods. These include the following:

1. Earnings-Based Valuation (Most Common)

The income approach is also called the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) approach, as it relies on the earning potential of the business. The metrics to calculate that will include factors such as:

1. Earnings exclusive of interest
2. Taxes to be paid
3. Depreciation 
4. Amortization of loans

These factors give a clear idea of when expenditures are deducted from the earnings. The value of a business will be high if its earnings margins are higher. Discounted Cash Flow, or DCF, is the method used for the income approach of valuation of behavioral health businesses. The income approach is most suited for affluent, profitable, and successful businesses.

2. Asset-Based Valuation

One of the most common ways of doing business valuation while selling or buying a behavioral health business is determining it through the value of assets owned by the business. These include tangible as well as intangible assets, such as:

1. Facilities
2. Technology
3. Licenses
4. Accreditations
5. Professional staff

This method typically depends on the current value of the assets and is largely influenced by the treatment outcomes and capacity of the behavioral health business.

3. Market-Based Valuation

This approach relies on methods such as comparison and contrast with recent M&A business trends in the market. For instance, selling a drug rehab business at a price decided by comparing with the price of a similar business sold recently in the market. Therefore, this approach relies more on the market than any other thing. Buyers usually look at EBITDA multiples, which commonly range from 6x to 12x in behavioral health, depending on the following factors:

1. Compliance
2. Payer mix
3. Size

The market approach should be taken when the market is on the rise, with demand for the business. You can go for valuation services to understand this process better. 

2. Knowing Key Factors Impacting the Price of a Behavioral Health Business

The businesses that are scalable, like scalable telehealth services in behavioral health services, are most sought after. Buyers pay higher prices for such businesses. The other category that is priced highly includes businesses with stability and low risk, which means there are certain factors on which the price depends. We have identified them here:

1. Revenue Streams and Payer Mix

Stability and multiplicity of payer streams positively impact the value of a business in a sale. Conversely, if a business only relies on the following traditional payer mix, it is destined to fare a lower price:

1. Medicaid
2. County contracts
3. Grant funding

A behavioral health business with insurance credentialing can be valued highly. In other words, a diverse payer mix with acceptance of Medicaid, Medicare, and commercial insurers signals stability. On the other hand, one-dimensional payment, out-of-network billing, or reliance on one payer is considered risky. This is why billing should be a prime concern. 

2. Clinical Quality and Staffing Structures

Staffing of a business, such as a PHP program or mental health business, plays a key part in its clinical quality. Behavioral health businesses having sellable faces as professionals and results can achieve a higher valuation very easily. You can ensure better pricing by the following things:

1. Stable clinical team
2. Credentialed providers
3. Licensed leadership
4. Medical oversight
5. Low turnover
6. Clinical documentation
7. Audit history
8. Policy manuals

3. Stable Referral Sources and Proper Demand Pipeline

A business is not going to do well at the sale if it lacks referral sources and possesses a poor patient influx pipeline. These two things are no-brainers in selling. So, you should do the following things to boost your business’s price significantly:

1. Establish referral channels
2. Forge partnerships with hospitals, physicians, schools, and employers
3. Digitally market your brand
4. Develop a website and optimize traffic
5. Focus on Google ranking, reviews, and ratings

4. Regulatory Compliance

In a market as regulated as behavioral health, legal and business considerations often take charge in deciding the value of a business. Valuation is positively influenced by a clean record of the following:

1. State licensing for services
2.  HIPAA Compliance and ethical standards
3. Patient confidentiality standards
4. 42 CFR Part 2, in case of substance abuse treatment services

Issues like noncompliance and pending investigations in terms of legal compliance bode unwell for a business and significantly reduce the buyer’s confidence and seller’s trust. 

3. Knowing What Causes Behavioral Health Businesses to Be Underpriced

Your pricing strategy is incomplete without understanding the common challenges and mistakes in behavioral health M&A that lead to underpricing. There are various factors that limit value, some of them are identified here:

1. Heavy dependence on one payer
2. Outdated Electronic Health Record systems
3. High owner involvement
4. Lack of accreditation
5. Gaps in clinical documentation
6. Weak accounting practices
7. Low census or inconsistent admissions

How Can Strategique Partners Help You With Pricing Your Behavioral Health Business for Sale?

Strategique Partners is a pioneer of behavioral health buying and selling. It has streamlined a number of mergers and acquisitions from the buying and selling side. Earning its name among the behavioral health circles, businesses and investors rely on it for better valuations as well. The reason behind it is that experts at Strategique Partners are linked with almost all segments of the behavioral business, from buying and selling to starting, running, and operating; so, they are most likely to give you accurate financial valuation services.

Worried about how to price your behavioral health business before a sale? If yes, contact Strategique Partners today!

FAQs Regarding How to Price a Behavioral Health Business

These are the most commonly asked questions about the pricing of  behavioral health businesses for sale:

1. Why Is Pricing Important in Behavioral Health Mergers and Acquisitions?

Business valuation in behavioral health M&A is important as it helps in the following aspects:

1. Accurate Determination of the Financial Worth of a Company
2. Negotiation of Fair Deals
3. Compliance with State Regulations 
4. Informed Decision Making
5. Attracting Potential Buyers or Investors

2. What Factors Does the Valuation or Price of a Behavioral Health Business Depend Upon?

The value of the behavioral health business is determined by some key factors. They have been listed here:

• Revenue Sources
• Accreditation
• Licensure and Regulatory Compliance
• Staff and Client Retention
• Market Reputation
• Payer Mix 
• Operating Efficiency

3. How State Regulations Impact the Valuation of Behavioral Health Businesses?

The behavioral health market has a lot of regulatory obligations, and each state has its own set of requirements. These requirements are necessary to be fulfilled. This is why those businesses that comply with state requirements are valued highly. On the contrary, non-compliance or licensing issues can lead to penalties, decreasing the company’s market value.